Tremendous Impacts of Inflation On Real Estate Investments
Explore the impacts of inflation on real estate investments, prices, and market dynamics. Learn how to navigate this economic challenge.
Over the past 5 years, the rate of inflation in Kenya has been on an upward trajectory. Predictions from experts, in this case, FocusEconomics Consensus project an average of 7.7% in 2022. However, regardless of the current economics, there are things real estate investors can do for inflation hedge so their real estate portfolio thrives under these conditions.
What is inflation?
By definition, it is the average cost of goods and services in a particular economy for a specified period of time mostly a year. Under normal circumstances, a high inflation has a negative impact on the society because the cost of goods tends to rise thus affecting prices of key commodities such as food.
Causes of Inflation
Inflation has various causes such as demand pull, cost push, increase in money supply, devaluation, rising wages and lastly policies and regulations. In this section of our article, we are going to look at each cause.
- Increase in money supply
In simple terms, this is the amount of money circulating in a particular economy. In circumstances where the supply of money is more than production rate, then inflation happens. Further ideas such as “printing” more money has an effect on inflation and risks destabilizing an economy.
- Cost push
This is the second type of inflation, commonly it is a result of increase of prices of goods and services when the cost of wagers and materials rise. In return, this cost is extended to the consumers who end up paying for good and services in the market.
- Devaluing
This is the descending adjustment of exchange rate of currencies of a particular country. Devaluation of currencies causes exports for a country cheap making other countries buy more while imports are expensive. This forces people to buy more internally because of low buying power.
- Demand pull
This a scenario where the demand for particular good and services is more that the economy’s ability to produce. This causes the cost of those goods to rise thus creating inflation. Additionally, most people are unable to afford due to the cost and scarcity.
- Policies and regulations
Some government policies can also cause inflation. For example, if a subsidy is given and demand rises more that the supply of that commodity then inflation will happen. Whereas, increase in taxes causing high prices of goods and services can also cause inflation.
What are the impacts of inflation on real estate?
Perhaps at this point, you are asking about the effect of inflation and real estate prices. We will help you know the relationship between real estate and inflation. Whether you are into commercial or residential real estate, at the end of this article, we hope to have given sufficient information on the impacts of inflation and real estate.
- Increase in real estate value
Real estate investments is known for property appreciation and cash flows. Among all investors, real estate stands out as an asset that beats recession. By definition, recession is a scenario where economic activities take a downward trend across all markets for a few months. As an investor other than putting your money in an account you can put it in a well selected real estate product.
- Increase in rents
Rent is one of the sources of real estate cash flows. When inflation rises, research shows that rent also goes up. In addition, you may find instances where the rent is higher than food and energy costs. This means that landlords and landladies tend to still increase their incomes while tenants have to pay more for the same service, house or environment.
- Devaluation of debt
By definition, devaluation is a downward adjustment to a country’s value of money relative to a foreign currency or standard. In most cases, when the value of the dollar decreases it makes paying current debt cheaper.
Bottom Line
It is with no doubt that real estate investment gives you a great advantage during inflation. When you invest right in properties you are set to enjoy massive benefits such as equity and cash flows. Some of the best investments in real estate are rental properties and REITS. Therefore, as inflation grows, ensure you also grow your real estate portfolio.