Economists remind that real estate prices remain stable during crisis situations unless they are accompanied by falls in economic growth.
In fact, real estate investments are perceived as safe investments in times of inflation or uncertainty and their returns tend to move upwards. Today we review the effects of inflation and deflation in the real estate sector.
The term inflation comes from the Greek and is defined as the generalized and sustained increase in the prices of goods and services during a certain period of time.
This increase causes the value of money or purchasing power to decrease . In financial terms, inflation is avoided by investments that offer more percentage gain than is lost by rising prices. Of course, beating inflation means taking on more risk.
Origin and causes of inflation
Inflation can be generated by a rise in consumption or demand , which grows more than the available supply. Or, due to the rise in production costs that occurs when the prices of raw materials rise and these are accumulated throughout the production process until reaching the final good or service.
The situation of 2022 accumulates the two types of inflation , as the world economy recovers and global demand and goods and services increase, but the prices of raw materials also rise, as there is less supply than demand in the oil, gas and gas markets. and other raw materials.
As there was no demand, there was no investment in the raw materials sector and as economies recover, bottlenecks occur because production cannot be increased at the rate demand does.
How inflation is calculated
Inflation is measured through price variations in a basket of standard goods and services called the CPI or Consumer Price Index , and published monthly by the National Institute of Statistics (INE).
The CPI for a full year is used to adjust increases in public pensions, as well as public employees or rents, among other variables. As it includes highly volatile items, such as energy or food, a second reading called core CPI is created , which does not include them
types
Inflation can be valued according to whether it is more or less intense during a period of time.
There is creeping inflation when it does not exceed 10%; moderate when it exceeds 10% but is still considered manageable; galloping , when it starts to get out of control; and hyperinflation , which is an uncontrolled increase in prices and the absolute loss of value of a currency: the purchasing power of the population is almost nil.
what is deflation
Deflation is the reverse phenomenon of inflation . It is when prices fall in a generalized and sustained way. This happened during the pandemic, as lockdowns caused demand for many goods and services to drop.
In the case of deflation, there is a lot of supply and little demand , which forces prices to fall and causes less growth in the economy, because with fewer profits, companies produce less and create less employment.
How inflation and deflation affect the real estate sector
Broadly speaking, inflation generates demand in the real estate sector , since the construction process takes time and has high costs, mainly for labour, land and raw materials.
This makes the real estate sector inflationary in terms of prices because supply always lags behind demand. You don’t build if there’s no demand, and when there is, responding to demand takes time.
Investors usually opt for the real estate sector due to the constant inflation in prices that makes investments profitable , both through purchase for later sale, and through purchase to rent, because if there is little housing on the market, also the rental price goes up.
home sales
When there is inflation, prices rise and investments of a certain depth, such as the purchase of a home, are stimulated . The buyer understands that – if he waits to make the purchase – it may be more expensive.
Put another way, speeding up the purchase protects the buyer from potentially higher prices .
In the same way, if there is deflation, prices go down and the buyer understands that delaying the purchase of a home is more interesting because it can be cheaper. In this case, delaying the purchase is not an inconvenience because prices are not going to rise and could even fall.
When selling a home, it is better to do it with inflation because there is more demand and a higher price can be asked for. Also, there is no rush to sell because housing will be more expensive in the future.
Therefore, it is interesting to buy a house when there is little inflation , rent it and wait for inflation or demand to raise prices and it can be sold at a higher profit. The real estate sector is always profitable in the medium or long term.
Rent of houses
When there is inflation, rental prices rise , because the owner can transfer that increase to the rent. In fact, it is normal to include in the contract clauses a revision of the monthly rent according to inflation .
When there is deflation, rental prices fall because the owner transfers this fall to the price so as not to lose the rents.
On the other hand, inflation can force the tenant to consider a purchase if the rental price is high.
In short, as the rental sector is more active, it picks up price changes more immediately and adjusts more quickly to inflation or deflation.
