Economic inflation is a common phenomenon in many (if not all) economies. It reveals the state of the economy as a whole and establishes the value of your money. Although inflation is very important for economic growth, excessive inflation might trigger a recession that would affect a wide variety of industries and, if poorly managed, could cause investors to fail.
What is economic inflation? How does it affect the real estate industry and you as a current or potential investor? If you are among those who aspire to secure a residential property such as a house and lot or condo for sale in the Philippines, then this article will tell you all the things you need to know.
Looking at Wallet
What is economic inflation?
Inflation pertains to the rate of increase in average prices of goods and services over time. When the inflation rate is high, the cost of products and commodities increases. Meanwhile, when inflation is reduced or stays the same, the prices of goods and commodities remain constant. In layman’s terms, inflation determines how much money is worth over time. That is to say that the Php 1,000 you have today will not be able to buy as much in the years to come. With inflation comes rising prices and a decrease in purchasing power.
There are a variety of factors that can drive inflation in an economy. But typically, it is due to the gradual rise in the cost of goods and services throughout the economy, or otherwise, it is due to an increase in demand.
What are the effects of economic inflation on the real estate industry and to real estate investors?
The rising inflation rates can be a pain to consumers in many industries. However, for the housing market and say a real estate investor, this increase can be an opportunity to acquire real returns from real assets. This then begs the question: is economic inflation good for real estate?
Counting Coins
Although the industry has its own share of ups and downs, real estate is generally a great investment option. It allows you to generate ongoing passive income and it appreciates in value over time—therefore the greater you hold it, the higher your returns will be. This makes it good for an inflation hedge with fewer risks as it is a more stable sector to invest in. To further elaborate, here is an in-depth analysis of how the real estate industry reacts to higher inflation rates and whether inflation affects real estate demand.
As inflation rises, property values increase
Price Increase
As previously mentioned, inflation drives up the cost of commodities, in which similar circumstances also exist in the housing market. Building a new house and lot or condo for sale requires more capital from real estate developers as the cost of the raw materials, equipment, and supplies needed to complete the project rises. To offset that increase, property values must inevitably spike. For real estate owners, this can work to their advantage as they can essentially develop equity for free. However, rising costs and higher loan rates could make it difficult for potential purchasers or new investors. Nevertheless, individuals who are able to purchase solid properties are put in a market with increasing housing values, which can also be used as an alternative reliable source of income. Additionally, the value of condominium properties typically increases at a rate that is almost always higher than the inflation rate.