You’ve probably seen the forces of inflation in work if you’ve recently bought, sold, invested, or otherwise participated in the economy.
But, in plain English, what does inflation entail, and how will it affect the already overcrowded housing market? Here are some things to think about to see if you’re doing everything you can to protect yourself against inflation:
What is inflation, and how does it happen?
Inflation is defined as a loss of money’s purchasing power, which is represented by an increase in the cost of goods and services in the economy. As a result, as inflation rises, every dollar you make loses value, affecting your ability to spend.
While there was already a shortage of housing and strong demand in the housing market before 2020, it is safe to conclude that the pandemic’s arrival worsened these trends. Many renters entered the property market in quest of their own house, while many homeowners looked for ways to trade up and expand their living space. As the demand for homes grew, many current homeowners chose to stay put, restricting the number of available properties.
The consequent housing market inflation is a simple case of supply and demand at work, adding fuel to the fire that was already roaring.
What effect does inflation have on the market?
For property owners
Inflation is really beneficial to property owners for a variety of reasons. The most obvious advantage is that your property’s value rises in tandem with inflation. With low supply and high demand, sellers can set their asking prices as high as they like and, in many circumstances, receive offers that are equal to or even more than their asking price. This makes it an excellent moment to sell, but a very difficult one to buy.
If you invest in a property as a leveraged asset, especially at today’s low financing rates, you’ll find yourself paying the same fixed rate even while the value of your home progressively grows. We are not yet seeing financing rates climb in lockstep with inflation in this inflationary environment, and as a result, your return on investment (ROI) can be predicted to skyrocket.
For would-be investors
In an inflationary market, potential investors face substantially different situations than existing owners, which is unsurprising. With that in mind, the most crucial consideration for this group is timing.
How long do you intend to keep the potential home? If you’re in it for the long run, you can expect to see the same value rises as current owners have. If you plan to invest for a shorter period of time, such as by flipping a property, “buyer beware” is a good phrase to remember.
The risk of being caught in a real estate bubble is one of the perils of short-term investing in an inflationary real estate market. Closing costs for new homes can be as high as 6% of the property price, and if you don’t have enough equity to cover those charges, you could lose money if the bubble bursts.
Housing prices have risen at an unprecedented rate in such a short period of time. While this isn’t always a cause for alarm, it does emphasize the need to know your expected investment time horizon and change your plans accordingly.
So, where do we go from here?
It’s reasonable that the ghosts of 2008’s housing bubble haunt buyers, sellers, and investors as we map out the market’s near- and long-term future. While predicting a market drop is tricky, it’s worth noting that there isn’t much evidence that one is on the way.
To begin with, the current asset market is nothing like what we saw in 2008, just before the Great Recession. Despite the labor shortage, the economy is expanding, unemployment is low, and optimism is strong as reopening efforts continue and greater possibilities emerge.
It’s critical to be wary of economic hazards while making any major financial choice. Thoughtful planning, time management, and getting financial guidance can all help you keep your money and yourself secure.
We’re here to help
Investing in the real estate market requires knowledgeable partners and informed decision-making. To ensure you’re making the best commercial real estate investment decisions for your goals, reach out to us at Asset Point Capital today.