Effect of Inflation on Home Buying

Let's look at the topic of inflation and what it means for a home buyer. It will help you make informed decisions. If you are going to spend a large sum of money, you need to know what's happening in the market. We will help you understand some basics. Let's dive in!

The Effect of Inflation on Home Buying

What is Inflation? 

Prices increase with time, and the rate at which this happens is known as inflation. As an individual, inflation is not a good thing as the buying power reduces or money you have in your pocket has a lower value after inflation than when you first earned it. However, from the macro point of view, it is good to have inflation in some cases. 

Some inflation should always be there in a healthy economy. Inflation fear allows people to buy goods, services, and even homes right now rather than later when the price of things goes up. It basically means that the producers have a lot of work. This allows the producers to hire more people, and these people tend to buy their own goods and services. 

The important part is to keep a lid and tap on inflation. You wouldn't want to pay Rs 100 for things you used to pay Rs 50 earlier. The fuel pump is generally the first place we notice where inflation hits. Around 2% inflation is the Government's target for the long-run goals. 

Also Read: https://www.tomorrowmakers.com/financial-planning/how-safeguard-your-investment-portfolio-inflation-article

Impact of Inflation on Housing 

Inflation affects home buying in the following two ways:

  1. Increases the interest rates of mortgages 
  2. Increases the home prices 

Once the interest rates on your EMI increase, you have to pay more and shell out more money than you would have previously. Your tenure for repayment might also increase. 

Home Prices

Like any other item, the prices of houses also increase due to inflation. It makes sense because the materials used to build homes start costing more, resulting in more expensive real estate. Also, building a house takes a significant amount of time so the investment done on the material and the labour over the duration increase the home prices due to inflation.

Also Read: https://www.tomorrowmakers.com/real-estate/home-buying-mistakes-avoid-infographic1

Home Appreciation 

When the value of a house appreciates, it experiences an increase in price over and above inflation. It means that the real estate sees real gain in value. Many factors affect this: 

  • Home Condition: Your home should be in good shape as it is the most fundamental factor for a high valuation. If your house requires repairs, it might take time to sell, or you might lose the deal. 
  • Area or Square footage: The higher the square footage, the higher the price you will fetch for your home. A house with more area gets sold for more than a house with a lesser area.
  • Bathrooms and bedrooms: In this case, also having more bedrooms or bathrooms is a good thing. The more rooms you have, the greater their utility. You can turn any room into an office. Everyone had to work from home during the pandemic, and more rooms would have come in handy. In the future, the world might follow a hybrid model. 
  • The location: The location really matters, and the price of the home might go up if the home is near schools, banks, beaches, entertainment venues, restaurants, etc. Buyers will also be more attracted if the house is closer to their office or near public transportation. 

Also Read: https://www.tomorrowmakers.com/financial-planning/decoding-inflation-infographic1

Returns on Investments

Returns on investments should increase with rising inflation. Any investor's primary objective is to get more returns on their investment than they initially invested. For this, their investment must earn more than the inflation rate. You don't want a 5% rate of return on your investment when the inflation is at 8%. 

Having a higher return on your investments means that you have more purchasing power. When you beat inflation, that's when you can go out and purchase your next home without having to worry about paying a higher price and spending money that you don't have. 

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