Finance

How Inflation Impacts Housing Prices & Your Home Loan Decision – Explained!

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Inflation refers to the prices of goods and services getting spiked. It is measured by the rate of change in the cost of things over a period. Now, the obvious things that get impacted by inflation are ones you buy on a daily basis. However, there are certain things that also get affected by inflation that many people are unaware of, for instance, real estate prices. From paying rent to commercial real estate – all of these get negatively affected due to inflation.

Here is how inflation affects housing prices:

  1. Increase in the construction prices

It is common knowledge that inflation brings about a rise in the cost of daily goods. Now, think about all the materials that are required during the process of building a home. Some of the materials that are used are bricks, concrete, drywall, stucco, and so on. All of these will now have to be bought at an inflated price. This ultimately has an impact on the entire property expense, making it more expensive for a homebuyer.

  1. Increase in price value

After looking at the expenses that have increased due to the construction costs of a home, it is easy to understand why the financial burden is greater on homebuilders. Ultimately, those who are looking to sell have no option but to set a higher price for the property. Of course, this is not the only reason that the prices of houses are on the rise. If the central bank boosts the money supply in the economy, an increase in property prices is expected.

  1. Decrease of property purchases

When inflation is on the rise, people naturally are not as keen to borrow money since it has just become more expensive. It is quite understandable why people do not want to apply for home loan plans in such a situation. Even the housing loan interest rate that lenders charge would go up during inflation, lowering the incentive of applying for a loan. Now, since home loans are not being applied for as much as they were before inflation, this can cause a hit to the economic growth.

  1. Difficulty for landlords in reaching agreements with tenants

Landlords do not prefer to rent out their properties when inflation is unpredictable. This is because it is difficult for them to renegotiate agreements with their tenants. For firms that are looking to make large capital investments, estimating profits in the future becomes difficult during inflation.

Now, it looks as though the COVID-19 wave might be behind us and a resurgence seems unlikely. However, the prices for the properties in India are still touted to not rise drastically, in spite of an economic recovery and new policies supporting the real estate market. Experts suggest that buying a house today can be a good decision. This is because of the fact that home loan interest rates have fallen as low as 6.50%, which has helped in increasing affordability.

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