Impact of Inflation on the Real Estate Industry

impact of inflation on the real estate industry is somehow righteous for investors because it decreases the property value in the market, but there are considerable side effects of it on the real estate sector; because, at some point, the business holders and real estate investors concerned about their assets and business.

This is the time when prices are at their peak, and there is lower demand for property in the market. In fact, in this period, construction gets more expensive; financial institutions face long-term debt devaluation, and mortgage rates are getting higher. Due to inflation, consumer prices increase, but does it affect real estate positively or negatively? 

That is what we are going to share with you in our article, and we will be going through that how investors in the market can position themselves in high inflation. 

You will notice that for the past few years in Pakistan, commodity prices have been increasing, and the inflation rate has been touching double figures. But this impacted the housing market in a good way. To understand the “Impact of Inflation on “Property value” better, let’s look at the term inflation!

What is Inflation?

Inflation is a period when people’s buying power declines due to the increase in the prices of services and goods. It happens because, in this period, the money you have decreases its value which directly impacts your spending ability. In such a case, consumers prefer to invest in only those goods that are their basic needs.

What this led to the economy! Not only in the real estate market but in all sectors, people stop investing, and the property value decreases due to less demand and competition. As a result, those with strong financial positions could invest in the market in the properties that are available at low prices (That is how the Impact of inflation on the market is good for them). 

What are the Causes of Inflation?

This year global inflation predicted by the International Monitoring Fund (IMF) that developing countries will face an average of 11.5 percent and developed nations 7.5 percent. There are several factors for this, but the main two reasons are the War in Ukraine and Global Supply Chain Disruption.

However, in Pakistan, there are different causes of Inflation; the government cannot manage the Balance of Payment (BOP) and always seek aid from the IMF. 

That is why the impact of inflation in all sectors is high because for the balance of payment; the government is increasing the prices of Fuel, Electricity, sugar, and commodities which impact all the industries in Pakistan.

Impact of Inflation on the Real Estate Industry

The impact of inflation is positive on the real estate industry compared to other sectors. Because this is the beneficiary period for investors but only with maximum capital and equity, this period affects only those who have a lower income spectrum. Real estate investors take benefit from the low property value in the market.

In inflation, compared to other investment opportunities like Gold, stocks, and crypto, real estate is the best option. How does inflation affect the real estate industry? Following are the positive and negative considerations. 

Positive Impacts of Inflation on the Real Estate Industry

Property Appreciation

The value of the properties has increased significantly over the past few years, according to data on real estate. For instance, a property purchased in 2018 for PKR 1 million might now be worth 5 to 6 million.

Any real estate investment would have easily outperformed inflation if we assumed this appreciation in the property’s value and compared it to inflation rates.

Increase in Rents

Rental rates typically rise in tandem with increasing inflation, just like the prices of other commodities. Due to a decline in people’s purchasing power, there is an increase in demand for rental properties.

Landlords with rental income will be able to cover the rise in costs regardless of the currency’s value or the pace of inflation.

Negative Impacts of Inflation on the Real Estate Industry

The following are the negative impacts of inflation on the real estate industry and property value.

High Construction Cost

The rising cost of all building supplies, such as steel, cement, and bricks, is a major factor that has a negative effect on real estate. The cost of constructing a home or other building has increased significantly because the prices of these materials move in lockstep with inflation.

Increased Cost of Borrowing

With rising inflation, the majority of central banks typically raise interest rates. This has an impact on borrowing costs for people looking to finance real estate purchases. In this inflationary environment, building a new home will be challenging due to the rise in borrowing and construction costs.

Final Thoughts

Although the real estate sector and property values are significantly impacted by inflation, those with stable financial conditions can still profit from the market. They can hold onto their property for a while, and when demand for real estate increases, they can sell it for a profit.