Understanding Real Estate Inflation: What You Need to Know

As we go into a period of high inflation, it’s important to understand how that can affect your investment properties. Let’s go over what real estate inflation is, what happens to real estate during periods of inflation, and how you can respond.

What Is Real Estate Inflation?

Real estate inflation is an increase in the prices of homes due to increasing demand for housing or rising interest rates. It's part of general inflation, which occurs when money loses its purchasing power over time due to economic conditions such as higher wages or increased costs for goods and services. When this happens, we are forced to pay more money for the same products and services we used to purchase at lower prices.

What Happens to Real Estate During Inflation?

When inflation increases, the prices of real estate tend to increase as well. This is because when people need to pay more for goods and services, they also have less money to spend on housing. As a result, there's an increased demand for rental properties and homes for sale. This increased demand results in even higher prices for real estate—and that’s what we refer to as real estate inflation.

How Should You Respond To Real Estate Inflation?

Real estate investors should understand how the market responds during periods of inflation and be mindful of their investments during these times. A good way to do this is by diversifying your portfolio with different types of real estate investments, such as apartments, vacation homes, or commercial properties. Additionally, it's important to stay on top of the local real estate market and monitor how much your investments are worth during periods of inflation. By doing this, you can adjust your portfolio accordingly and avoid losing money due to inflated prices.

Understanding real estate inflation is essential for making smart investments in the housing market. Knowing what happens to real estate during inflation and how to respond will help you protect yourself from financial losses when the markets change. With that knowledge in hand, you'll be better prepared to make wise real estate decisions on your properties.

Real estate inflation is not the same as appreciation. Appreciation occurs when the market value of a property increases due to factors such as updates and improvements made over time, changes in demand or supply for properties in the area, or other economic factors. In contrast, real estate inflation is an increase in the overall cost of goods and services associated with real estate (such as mortgages, insurance premiums, taxes, home improvement materials etc.), which can make it more expensive to own a home or invest in real estate.

In some cases, the economy can hit real estate stagflation. This happens when prices rise faster than wages and salaries do—essentially meaning that purchasing power decreases even though costs are increasing. Real estate stagflation can be caused by a variety of factors, such as tight credit conditions, low consumer confidence, and a limited supply of properties.

Is Real Estate an inflation Hedge? 

While there is no one-size-fits-all answer to this question, some experts believe that real estate can be used as a hedge against inflation due to its relatively stable returns in the long run. Investing in real estate over time can help protect your capital from losing value due to inflation. However, it's important to keep in mind that real estate prices are affected by market forces which can lead to decreased returns in the short term—so doing your research and investing wisely is essential. Read my articles on my real estate blog, check out my YouTube channel, and take my real estate investing course to learn everything you need to know. 

Overall, real estate inflation can make it more expensive to own a home or invest in real estate. But if you are willing to invest when others are fearful of a recession, you can find great deals that will yield returns for many years to come. Understanding the causes and effects of real estate inflation is important—as well as considering whether investing in real estate might be an effective inflation hedge. With this knowledge, you'll be better equipped to protect your investments from the effects of rising prices.