How High Inflation Markets Affect Real Estate.
High inflation times can make or break a real estate investment.
There has been a lot of talk and speculation in the news lately about the forecast of our monetary system in the Nation. Some expert says we are experiencing high inflation and the next says it is deflation and yet another says stagflation.
While no one can know for certain what the future will bring, for educated real estate investors. It’s wise to understand how real estate inflation works, how a high inflation market can impact your assets or debt, and the best way to hedge inflation.
The covid 19 pandemic has had its rippling effect on all economies, regardless of the current economics. There are things real estate investors can do for an inflation hedge, so their real estate portfolio thrives under these conditions.
What is inflation?
Essentially, it is the decrease in the purchasing power of the Naira over time. Taking the average rate of 10% inflation, the ₦100,000 washing machine you bought last year will likely cost you an additional ₦110,000 today.
That may not seem like much, when you add costs up for all your purchases, including groceries, gas, phone bills, etc. Over a year, you will have a much higher number and higher cost for goods over time.
If a country experiences above-average inflation, it could have an even bigger impact. For example, Nigeria had inflation nearing 35% in the recent decade, meaning that the same ₦100,000 washing machine would cost an additional ₦135,000.
It is important to note that inflation is not appreciation.
An appreciation rate, as it relates to real estate, is the increase of a property’s value over time. With appreciation, value does not increase in relation to the currency. It increases based on demand. You can have scenarios where a home appreciates more than the inflation rate, and alternatively. You can have it depreciate in an inflationary economy.
How does it affect real estate?
Probable positives during times of high inflation are rising prices for rental property rates. When an economy is experiencing high inflation, it can be difficult to get a loan. A high rate of interest means buyers have less purchasing power, so many continue to rent.
The surge in demand results in increased rental rates, which is great for landlords.
And while appreciation is a distinct and separate market analysis, in general, housing prices tend to rise in an inflationary economy.
Real estate has intrinsic value; people need to have roofs over their heads regardless of the value of their currency. If you’re able to offer favorable terms for private purchase, you’ll likely have a line out the door.
Potential negatives for a real estate investor in inflationary times is the increased cost of borrowing debt.
To make sure the bank or a developer does not get shorted. They will charge higher interest rates and offer fewer loans or shorter payment plans.
Increased costs of building materials for new homes are another disadvantage. Between the high cost to borrow and the additional cost to build, new construction can be a very difficult investment during inflation.
When pockets get tight, travel usually gets cut from the budget quickly. Vacation rentals, locations that are driven by tourism, or retirement communities may not fare as well as other forms of real estate investing.
Wise investments for an inflationary economy
Investing in real estate is always highly dependent on the market and location of the property. However, generally speaking, the following real estate investments fare better than others in a high inflationary economy:
• Rental property, including residential, commercial, multi-unit, and single-family homes will likely have higher than normal demand and returns.
• Note investing: Banks may be offloading higher than normal quantities, which will result in less competition and lower prices.
• Real estate investment trusts (REIT) will follow the market demands. An appreciation like that of physical real estate and can be a good way to distribute your investment across a large number of assets.
Having funds available to be able to seize an opportunity when it arises will be critical. Inflation can impact real estate investing both positively and negatively depending on what kind of investment it is. The specific market, and various other factors.
Make sure to do your due diligence as with any sound investing and consult with your Realtor to identify promising options for your market.