In times of inflation, the winners in the housing markets tend to be investors looking to scoop up homes due to foreclosureure
Like rising home prices, inflation reached multi-decade highs in 2022. Generally, as inflation increases, housing prices and other property assets will follow. One of the reasons that real estate prices increase in times of inflation is that investors seek assets that provide returns that exceed inflation. Real estate prices generally increase during inflation caused by rising costs and an excess of the money supply.
That is, advisers and investors need to know that when mortgage rates increase during periods of inflation, the demand for real estate typically falls because the debt becomes more expensive. Investors have used real estate as a hedge against inflation, taking advantage of lower mortgage rates, passing the increased costs along to tenants at higher rental prices, and reaping the long-term benefits of rising housing values.
Given that, in most circumstances, inflationary environments result in higher rents and asset prices, real estate is considered an excellent hedge against inflation. Rising real estate prices often result in higher rents, contributing to inflation. Of course, rising housing prices are not the only contributor to higher inflation.
Even when inflation is high, the excess housing supply drives home prices lower. Home prices rise if the housing supply stays flat but housing demand increases. When a central bank increases the supply of money in an economy, which is a significant contributor to inflation, the prices of homes will automatically rise. This is why rising housing prices theoretically affect inflation. As opposed to the value of your down payment, house prices increase at the rate of inflation multiplied by the house’s value. During an inflationary period, prices of almost anything increase, including housing costs and rental fees, and mortgage interest rates usually increase too.
A country’s central bank sometimes meets inflationary expectations caused by rising prices, which introduces higher interest rates to slow the increase rate, protect the currency’s purchasing power, and avoid higher inflation and hyperinflation. When there is deflation, banks usually maintain lower rates). Many cannot afford to purchase higher-priced homes, even though interest rates on fixed-rate mortgages are still low. As the Fed increases rates, it pushes up mortgage rates and adds to the already higher home prices.
Inflation has a lot of ripple effects related to housing, usually including rising mortgage rates, rising asset prices, longer-term debt getting cheaper, building getting more expensive, etc. All else being equal, in periods of inflation, you would expect commercial real estate to increase in rent and other inputs like commodities, goods, or labour.
Landlords would have difficulty raising rents when rising prices drive the cost-push inflation, but there is no corresponding rise in demand. Office, retail, and condominium rents are usually tied to consumer prices, which increase in line with inflation, driving up real estate revenues. While these decreases might look big, they are expected to offset only some of the housing price increases after February 2020 (for instance, U.S. housing prices rose 42%, while Canadian prices rose 52%, not adjusted for inflation).