The housing market is one of the delicate markets globally and can be tough to understand. One of the struggles you may face here is the correlation between inflation and home prices. Is there a correlation between the two in the first place before diving any further? You need to understand the two before you get into the market. It will give you an edge as you will easily tell when it’s best to buy a house according to your budget. Below is a summary to help you understand how inflation impacts the housing market.
What Affects Housing Prices?
The first thing you want to determine is what affects the housing prices before you go any further. For example, when the supply of houses is constant, the price of the homes remains the same. This will then mean that the demand for houses will only go up. After that, there will be a chain reaction that will cause the prices of the houses to go up. Remember that this all started due to a constant supply of houses. Another thing you need to note with houses is that when the interest rates are low, the houses are affordable. With the houses being affordable, there will be an increase in demand for the houses. You need to note here that the interest rates for the homes will be low thanks to inflation, and this is the perfect time to consider financial freedom with real estate investing. That’s where the correlation between inflation and housing prices comes in.
You also need to understand inflation before determining more on the subject. A straightforward explanation of inflation is the decrease in purchasing power of money. This is reflected in the increase in the price of services and products. For example, as you have seen above, when the purchasing power of money decreases in the housing markets, the price of houses goes up.
How Inflation Affects the Housing Market
Inflation affects any good with limited supply in any economy. For example, where there’s a limited supply of houses in the market, the prices will go up as a rule of thumb. When there’s a huge supply, the prices will go down as a result. To further simplify this idea, take this, you have a money supply of $20 in the economy. You then have four identical houses in the same economy; each house will be priced at $5 – this is with the assumption that there are no other goods in the same economy. If the central decides to print more money, to around $40. The price of each house will then go to $10. The bank would have increased the money supply. As a result, house prices and inflation will increase. You need to note that the scenario above is a simple example. Dealing with the same situation in the global market is a bit hectic as other factors are in play. As stated above, you need to check the other factors that’ll affect house pricing.
Inflation Impaction the Housing Market
The housing market and inflation are intertwined in the long run. One affects the other, and you need to understand the various other factors that come into play here before figuring out the correlation.