How Inflation Affects Real Estate Appreciation & What You Can Do About It
Inflation is becoming more and more relevant to modern-day life. Whether it’s food prices, lumber prices, or used car prices, inflation seems to be getting worse. In fact, inflation is at its highest level since 1982. The CPI (consumer price index) inflation levels were recently marked at 7 percent. This means that goods in this “basket” were 7 percent more expensive than they were the year previously.
One of the hardest-hit areas for inflation in 2021 was used cars. The average price of used cars rose 25 percent in 2021. This is an astonishing price rise and it made it much more difficult for Americans to find used cars that they could afford.
Real estate has also been heavily impacted by inflation in the last several years. In fact, in 2021, home prices rose a whopping 16.9%. The median home price in 2021 was $346,900. In this article, we are going to break down everything that you need to know about how inflation affects real estate appreciation and what you can do about it.
Inflation and Real Estate Appreciation
To put it simply, inflation tends to drive the prices of real estate upwards. This is true for all types of real estate including single-family homes, multifamily homes, commercial properties, etc. It also drives rent prices up.
Property appreciation and rent hikes are a very good thing for real estate investors. This is because investors get to sit back and simply watch as the value of their real estate investments increases as rent increases. In fact, rising real estate prices caused by inflation is one of the primary benefits of being a real estate investor.
Inflation is a price rise that is the result of too many dollars chasing too few goods. As the government continues to print more money, it increases the currency supply. When the currency supply is increasing too quickly, it results in price increases in real estate. This has happened in a very significant way during the COVID pandemic because mortgages rates have been very low and because the government printed trillions of dollars to use as a “stimulus” for the economy.
Because real estate prices tend to increase and keep pace with inflation, many people use real estate as a way to hedge against inflation. When inflation occurs, the purchasing power of each individual dollar decreases, meaning each dollar can buy fewer and fewer things. So for people who keep most of their wealth in cash, inflation can be a serious problem. But for people who invest in hard assets like real estate, inflation can actually help them to build wealth, or at the very least preserve purchasing power and protect themselves financially during inflationary periods.
Inflation and Construction
Although inflation pushes home prices higher, it also pushes construction costs higher. This is because the prices of lumber and other building materials tend to rise in addition to the cost of labor. This means that as inflation rises, real estate development can be more and more expensive.
But this shouldn’t deter you much if you are a real estate investor or developer because the rises in real estate and rent prices can offset rising costs of development. This is especially true if inflation stays high long after the project is completed.
Inflation and Debt
Essentially, debt becomes cheaper as inflation increases. What this means is that inflation makes it easier to repay your mortgage debt as time goes on. This is because the prices of your mortgage remain fixed, but more and more dollars are being put into circulation. Because of this, wages and salaries tend to go up. This means many people have an easier time paying the initial debt they took out as time goes on because they make more money, but their mortgage costs remain the same.
For this reason, inflation can be something that helps people to feel confident investing in real estate because they believe that it will be easier to make their mortgage payments over time. For a lot of real estate investors, this definitely becomes the case. Generally speaking, inflation makes it easier to pay off debt that is fixed and real estate debt is no exception.
Hedging Against Inflation
When inflation rates are high, it becomes increasingly important to hedge against it. This is because inflation represents a weakening of a currency. So, if you hold onto a currency and if it becomes increasingly weaker, so too will your financial power. But if you invest in real estate, you will preserve and perhaps even enhance your financial power.
Throughout history, from ancient Rome, to the Weimar Republic in Germany, to Zimbabwe in the last few decades, inflation has destroyed currencies and resulted in currency savers losing their wealth. The highest levels of wealth destruction come during periods of hyperinflation, which usually occur when central banks print extraordinary amounts of currency to try to help keep a struggling economy alive.
In the United States, we are not currently in a state of hyperinflation. Hyperinflation occurs when prices increase more than 50% per month over a period of time. But, just because the United States is not currently in a state of hyperinflation does not mean that we won’t one day get there or that it is not smart to hedge against inflation.
Inflation has a dramatic impact on real estate. Inflation is bad for renters because it makes rent go up and it also makes housing prices go up which can make it more difficult to buy a house. But, it is great for real estate owners and investors for the same reason. Inflation also makes it easier to pay mortgages off because mortgages rates remain fixed while currency supplies increase in addition to salaries.
Considering the fact that CPI inflation is at 7 percent, it is time for people to start taking inflation seriously. Saving cash in a bank account becomes an increasingly risky long-term strategy as inflation increases. This is because it provides no protection from the weakening of the currency.
Real estate investing, on the other hand, provides ample protection. This is because when inflation occurs, hard assets such as real estate in addition to other inflation hedges, like gold and silver, all tend to increase significantly in price. So, if you are not already invested in real estate, then now really is the time you might want to strongly consider doing it.
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About the Author
Ellie is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don’t have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.