What Does Inflation Mean for Property Prices?

Inflation rates and property prices go hand in hand. During periods of high inflation, property prices are also likely to rise and consumers tend to need to borrow more money as the cost of living becomes more and more expensive. For some homeowners, they may need to sell their property fast in order to avoid falling into a cycle of debt.

However, if prices rise by too much that demand decreases, this can lead to falling prices.

What is inflation?

Inflation is the term given to prices rising over a period of time. It can be caused by many different factors including price perception, changes to supply and demand and excess money supply. During periods of inflation, the purchasing power of a currency decreases meaning that goods and services become more expensive than they previously were.

What is the correlation between inflation rates and house prices?

In periods of inflation, the prices of all goods and services experience an increase – this extends to property prices as, like with other goods, there is a limited supply of properties. If money supply expands but the supply of available properties is the same as before, this increase in money supply will cause inflation to rise and property prices to increase.

Another contributing factor to rising house prices in periods of inflation is increased interest rates. When interest rates are low, buying property becomes cheaper for prospective buyers and demand is likely to increase. If the supply of homes remains the same and there is increased demand, then property prices will increase. Thus, inflation usually is more impactful for property prices in locations where properties are more limited.

What happens if you own property during periods of inflation?

During periods of inflation, the real value of your savings falls. However, property is a good asset to have during periods of inflation because its value will actually rise with the inflation rate. 

If you have purchased a house, it is likely that you will have needed to put down a deposit as a contribution to the overall price (usually 20 to 30%). When house prices rise due to inflation, it is the overall house price that is rising, rather than the cost of your down payment; this means that however much inflation has multiplied the value of your house, it will have increased your down payment by even more. This means that you are actually paying less for your mortgage than you initially did.

If you own a rental property, you will  most likely be earning more money during periods of inflation.

For many people that have debt already and who have large mortgage and debt obligations, they may therefore need to borrow money online instantly in order to be able to stay afloat as inflation bites and takes its toll.

Does building a home cost more during periods of inflation?

During periods of inflation, housing construction costs increase due to more expensive materials and supplies, increased land costs, and need for higher wages. These increased costs are typically absorbed by the home buyers rather than the builders meaning that property prices will rise.

Some secured loans such as second charge mortgages and others (more information) can have fixed rates which will mean that the effects of inflation are not fully felt until such time the fixed rate period ends and the interest rate then rises.

How does the supply and demand of property influence inflation?

An oversupply of a certain good and service always has the potential to influence inflation. For example, regardless of whether inflation is already high, an oversupply of housing will bring property prices down. However, that being said, when inflation is high, so are interest rates and rental costs meaning that both homeowners and renters will likely be paying more. If these increase by too much, it will lead to less demand for mortgages and people will stop taking out loans. Once the demand decreases, home prices will once again fall.