Impact of Inflation on Real Estate Investing

Even though experts believe that reported consumer price increases have likely reached their zenith, rising house prices and renting costs in major Indian cities could present a new challenge in the country’s central bank’s battle against inflation.

Housing rents and auxiliary costs, which account for 10.07% of consumer price inflation in India and are at or near three-year highs, present a new source of concern for the central bank, which spent the majority of last year dealing with increasing food prices.

According to statistics from the Ministry of Statistics and Programme Implementation, the inflation rate for urban property increased to 4.47% in December 2022 from 3.61% in the same month the previous year and 3.21% in December 2020.

The index is still very near to its highest value since 2019, despite a small decline from 4.58% in October to 0.49% in November and December.

Inflation is currently affecting all asset groups, including real estate, in India’s economy. Retail inflation in the nation was 5.88 percent in November of this year, which is less than the 7.41 percent in September and the 6.77 percent in October. The Reserve Bank of India is unlikely to abandon its recent aggressive monetary policies, even though inflation figures are down.

Real estate has historically shown to be a reliable business, even during rising times. 

As property rental prices rise and current real estate assets gain in value, inflation can actually be advantageous for real estate investors. Due in part to the greater cost of building supplies, property values typically rise along with inflation. Steel and cement prices have increased due to inflation, which has raised the price of homes that are still being built.

The market’s decreased quantity of new properties will also have an impact on the price of current properties. In periods of inflation, there are fewer new homes because developers postpone projects due to increasing construction costs. As a result, there is a decrease in the supply of properties, which raises house costs. Due to high house costs, potential purchasers may be forced out of purchasing real estate.

Property rents, which typically rise, are also significantly impacted by inflation. Banks raise the interest rates on house loans during an inflationary time to remain lucrative, which raises the cost of financing for homebuyers. It may be more difficult than ever for customers to find favorable conditions on a house credit during times of high inflation. As a consequence, many people are forced to continue renting, which raises the demand for rented homes. Rent prices rise as a result of tenants’ willingness to pay higher rentals in an inflationary economy rather than take out expensive house loans.

For real estate owners, inflation has some advantages. 

It helps current residents because property prices rise when inflation is high. Homeowners seeking to sell their properties can get a decent deal thanks to a smaller supply. Because they can now raise rates and guarantee higher earnings every month, real estate owners also benefit from higher yields on their assets during inflationary times. Because workplace and store leases increase during inflation, it is advantageous for developers of business real estate as well. Returns on private real estate remain stable during inflation.

Although no one can predict how long this inflationary era will last, potential investors and house purchasers need not worry. Real land will always be in demand. Residential real estate is a secure financial refuge during inflationary times, according to Stanford University research. According to the research, the inflation of the 1970s caused house prices to rise compared to the size of the economy. Instead of flipping the property for a quick return, investors should purchase real estate for the long run. Rising inflation has a detrimental effect on other asset classes, such as stocks and mutual funds, but can benefit real estate owners by raising their revenue. 

Long-term tenants lose out when renting a property because rates typically rise annually during inflationary times. On the other hand, purchasing a home or making an investment in rental homes has proven to be a reliable price hedge. The assets will become lucrative as rents rise throughout cities.  Real estate is a fantastic business that consistently provides sizeable returns over the long run. Real estate investments that generate income can help you increase your retirement savings or give you additional cash flow to cover monthly expenditures. The property market is booming, and more and more people are looking to invest in real estate. In truth, there has never been a better moment to buy property.