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The Effect of Inflation on House Prices

The Effect of Inflation on House Prices

The Effect of Inflation on House Prices

A house is a hedge against inflation better than a savings account.

Overview

Inflation is often defined as a sustained increase in prices of a wide range of products. Economists explain that rising prices are a symptom, however, and not the cause. The cause of inflation is the devaluation of the currency, often caused by the introduction of the currency in the economy. As a simplified example, say that is $ 100 available to buy 100 cheese steaks. The price of meat and cheese will be $ 1. Someone printed another $ 100 exclusively for cheese steaks. The price of the 100 cheese steaks will become $ 2 each.

Demands effects

In the absence of economic pressures and supply and demand, the price of goods remains the same. If the only change in the economy is the sum of money, the price of goods will rise. Of course the economy is dynamic, nothing stays the same and there are a number of starting pressures and changing every day. But when the influence of other factors is small, the more money moves much faster increase the price of almost everything. So with inflation, housing prices tend to rise (Miron, 1993).

Take

Housing is generally seen as a good asset when it comes to inflation, partly because it will rise with inflation and partly because it is asset leverage. When you buy real estate, you make a down payment of perhaps 20 to 30 percent of housing prices. The house price increases in the inflation rate times the cost of the house, not the cost of your down payment. So if inflation doubled the value of the house, there may be four times the value of your down payment. If you took a fixed rate mortgage, you have done even better because you are making a payment that was reduced in inflation adjusted dollars, which is paying less for the loan that you did when you took ou (Madura, 2007).

Moderating factors

Supply and demand affect prices. Even if inflation is high, excess supply of housing will bring housing prices down. Interest rates tend to rise with inflation. Mortgage rates reflect interest rates. If mortgage rates rise too high, people will not take out mortgages. The demand will be reduced; house prices will fall.

Cyclical effects

Continued high inflation and damage the economy. It has devastating effects on people with fixed incomes, especially the elderly. It is difficult to compete internationally, because it becomes so devalued currency. And so, at some point, either through the course of events transmitted through devaluation or the aggressive action of monetary policy to reduce the money supply, inflation ends. It cannot, and historically has never been gone (Kiff, 2009).

Time

Because there are so many complexes, dynamic factors, interactive influence the economy, it's really not possible to predict inflation. But considerable influx of precursors includes expenditures by the government within a short period of time and an increase in the introduction of money by the Treasury. These are the measures taken to counteract the contraction in private sector ...