Inflation can be referred to as an average increase in prices of goods and services in an economy over time usually a year. In other words, it can also be defined as a decrease in purchasing power. Based on the consumer price index, Federal Reserve has set the target of 2% inflation. Deflation is the decrease of the price of goods and services in an economy over time usually a year. Deflation and inflation are both major parts of the economy.
Real Estate in Inflation
Real estate is a good hedge against inflation on basis of theory. All other things being equal, one would expect the commercial rent to go up the same way as the prices of goods, labor, or raw materials. Lease renewals to keep the rent “marked to market”. The strong link between rental income growth and inflation will be heavily influenced by many factors such as the supply and demand balance in the market which would suggest whether the landlords can increase the rents or not depending on the condition of the market. Inflation has many types and the type of inflation also matters. If costs are going up by demand-pull through strong economic growth, we would expect the demands and rents to hike up. Whereas landlords would find it difficult to increase rents when cost-push inflation is driven by rising prices without any kind of increase in demand.
“Inflation is the Mother of all -Evil”
Effects of Inflation on Real Estate
While inflation hurts intangible investments and the daily market fluctuations, it can actually strengthen your commercial real estate investments and many other assets. Due to the inflation, the prices of labor and the material go up creating a shortfall and limited supplies. Production costs are so high that new projects become really difficult due to the costs. This leads to a limited supply of buildings with comparatively low costs. These causes arise in both rental income and property value in the short run. Real estate leases are mostly made with annual rent increases, this protects property owners from the expensive prices due to the inflation.
As the general prices increase the rental prices take a hike as well. This means a greater monthly rental income as well as an increase in your property value over time. This is also beneficial to borrowers as the time when they took the cash, it had more value as compared to the time they’ll return the money due to the money’s value being dissipated .this value they’ll have a good advantage due to inflation.
Even though the commercial real estate doesn’t get affected by the inflation in a negative way, there are some factors that have the tendency to affect how well your investments do. Lease duration and how it is structured play an important role in this. If the lease is structured in short term it’ll likely be more beneficial for the property owner as he can adjust rental rates with reference to the current inflation-affected market. This means a high monthly income.
Effects on Investors
The talk about inflation has sent a wave among the investors or is it said so? Those who invested in real assets have had inflations effect quite opposite than others, mostly the effect was in a positive way rather than in a negative way. Looking back at the previous inflation periods, both commercial and rental properties value have increased. Given these are the two main real estate returns investment. These provide security in terms of a volatile economy. In conclusion real estate acts as a hedge against inflation