Inflation, an essential aspect of the economy, influences our daily financial decisions. The increasing and variable rate of inflation holds power over the purchasing capability of products and services. Real estate, like other assets, is affected by inflation in various ways.

This market is closely tied to the inflation concept as it can affect the demand and supply of properties. Inflation is continually reshaping the real estate sector leading to rising home pricing, increasing mortgage rates, higher cost of construction items and labour, and an imbalance in demand and supply, to name a few. 

Rising Costs

The increasing cost of construction materials used to build a home is directly proportional to inflation in the real estate sector. As the prices of lumber, concrete, bricks, drywall, and other construction items rise, a significant percentage of these costs are used to mark up the cost of new homes.  In times of high inflation, the cost of labour typically increases as well, leading to higher prices for new homes and renovation projects. So as home builders are required to invest in more expensive materials and workforce, they pass on these costs to the buyer. 

The Delicate Balance Between Demand and Supply

So, if a home builder is paying more, then these costs are included in the selling price. The buyer will ultimately take on the consequences of inflation. Also, in large cities or tranquil yet well-connected villages where land availability is often limited, one will observe a more pronounced inflation effect. Moreover, as the pandemic hit, an extreme growth in home values was witnessed. The world experienced a pandemic-fueled migration to smaller cities and the suburbs.

So if there is a disruption in the supply and demand ratio where the supply of homes remains constant and the demand increases, then the home prices are bound to increase.

The Finance Aspect

Rising inflation can also lead to higher interest rates.  This makes borrowing more expensive for homebuyers and investors. This in turn can substantially reduce affordability and potentially deter buyers from investing in real estate projects. In addition to this, growing inflation can contribute to higher property taxes and insurance costs, adding to the financial burden on property owners and investors. Managing these financial challenges requires careful planning, research, budgeting, and possibly exploring alternative financing options. 

The Positive Side to Real Estate Investment

Overall, while inflation can create some challenges for the real estate market, it can also create opportunities for investors who can efficiently navigate through the changing economic landscape.

Some of the benefits of smartly investing in real estate right now include long-term appreciation in value, potential income from rental properties, and tax benefits.

Read our blog on how owning a home can shield you from inflation.

In a high-inflation environment, real estate can be an attractive investment as it is a tangible asset known to retain its value better than other assets such as money. Additionally, owning a vacation home is a great idea as it can be a comfortable and convenient getaway with family or friends. However, it is imperative that you conduct thorough research and due diligence before investing in real estate to ensure that it aligns with your financial goals and risk tolerance.