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How Does Inflation Affect Property Investors?

How Does Inflation Affect Property Investors?

Housing is one of the preferred options of the Spanish investor. However, in this inflationary environment, many wonder how the increase in the CPI affects the real estate market. It is essential to be informed since, on many occasions, uncertainty could be a better adviser, and it can lead us to lose good opportunities.

The inflation data for last September placed it at 8.7%, information published by the National Institute of Statistics. The question is: does this have a direct impact on homes? What data should the investor be aware of? In this article, we will explain how CPI affects this sector.

What is inflation?

Inflation is the general increase in prices. In free market systems, it is considered positive that these increase in a progressive and controlled manner since this means the economy grows.

However, when this price rise gets out of control, increasing too much and constantly, money begins to lose value. As a consequence, citizens begin to lose purchasing power, being able to buy fewer things with the same amount of money.

In fact, if we ask our parents and grandparents about their youth, they all agree that before, they bought many more products with much less money. That is precisely the effect of inflation.

What are the causes of inflation?

You may be wondering what happens to trigger that price increase we are talking about. The truth is that the reasons why periods of inflation begin are diverse. Sometimes, only one of them occurs, while other times, several occur at the same time.

  • Supply and demand problems: one of the leading causes of inflation is that demand is higher than supply. When consumers are interested in a scarce good, they are willing to pay more for it, which is why prices rise. The confinement due to the pandemic caused the production stoppage, a “supply shock”. This has caused prices to rise.
  • Increase in production costs: another reason that raises the prices of products is the increase in raw materials, labour, energy, etc. All of these factors make the products more expensive to manufacture, so prices go up to maintain profit margins.

An increase in the money supply is the third most prominent factor that causes inflation. When the Central Banks print money to be able to finance States or Entities, the money in circulation increases, which keeps demand high and, therefore, generates inflation.

In the current environment, all of these factors have had something to do with the rise in the CPI. The coronavirus pandemic, the war in Ukraine, the decrease in OPEC production, negative interest rates, and other factors have caused us to find ourselves in an inflationary environment.

The question now is what to do to make our money profitable and prevent it from losing value over time. Housing has traditionally behaved as a refuge asset in inflationary periods, so we will see how it has been affected at this time.

What effects does inflation have on the housing market?

The first thing you should understand is that the real estate market has assets that behave differently in times of inflation. Acquiring a new or second-hand home is different from buying land.

To start with, rising production costs clearly impact newly built real estate. Construction companies face higher expenses due to labor, materials, etc., so they are expected to pass this increase on to home sales prices.

On the other hand, there are second-hand houses. If we eliminate the factor of production costs, it is logical that the price of these goods will be less affected than that of new construction. Experts consider, therefore, that these properties can currently behave as a refuge value.

Another sector affected by inflation is the rental market. The current inflation will also be noted in this area for different reasons: the increase in prices will make many people who rent consider the purchase option; In addition, the new housing law that limits the increase in monthly payments for large tenants may hurt supply, causing it to decrease.

Finally, we must also consider the impact of inflation on mortgages. To reduce the CPI, the Central Banks are applying interest rate increases. This rise affects variable mortgages, which will see their quota increase, while financing to acquire new properties is limited, which could affect purchasing a new home.

Investing in real estate to face inflation?

Considering all the above points, investors should assess whether buying a property at this time is an excellent decision to protect themselves from inflation. Of course, it depends on the liquidity available, the ability to pay and the opportunities found.

Right now, second-hand housing can be a good refuge asset, considering that inflation will have less impact on it, which does not mean that its price will not increase in value over time. But, in addition, renting it could generate extra profitability.

Many turn to real estate in search of security and stability, since they are still assets that most of us know.

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