Higher inflation promotes spending, as consumers will voraciously purchase goods before the prices rise further.
Based on this concept, which addresses the relationship between increased spending on consumer goods and inflation, it is reasonable to infer that there is a correlation between increased demand for houses and inflation.
For any consumer goods, increased demand leads to an increase in the price because the production capacity falls behind the demand.
The same goes for the housing market; the presence of inflation will stimulate people to purchase houses before the prices further rise and this increased demand for houses will further exacerbate the house price by increasing the supply-demand gap.
Inflation, the main driving force behind this concept, is when the decrease in the value of a currency causes the price of consumer goods to increase. When there is an excess of money supply, or in other words, when too much money is printed, the currency loses its value and buys fewer goods than it did before. Hence, more money is required to buy the same consumer goods.
There are several ways house prices can increase from inflation.
First, the price of the materials for house construction can be high. When the increased money supply is used heavily on these raw materials for building houses, the cost of the houses will increase. This is because when the materials are too expensive, less of the materials are available, which in turn limits the construction of houses and increases the monetary value of each house.
Subsequently, as mentioned above, the increased demand for an item can outnumber the actual number of items available and cause the price of the item to increase.
When people are aware of this increased demand for a product, the third type of inflation can arise. As people feel threatened by inflation, they want to purchase the goods before anyone else does. This greatly contributes to further increasing the demand and price of the product.
In addition, when workers become aware of how they need to work more to meet the demands of consumers, they want more money to make up for the increased work hours. This also brings about inflation and increases the price of the product.
And essentially, when it comes to the housing market, the effect of inflation isn’t small.
According to Marketwatch, about 9.2 billion people with comparatively low income spend more than a third of their incomes on houses. This means that they inevitably have less to spend on other necessities in life and that some will even have to sleep outdoors.
With the coronavirus and high interest rates, the situation worsened. As unexpected layoffs and unemployment became more common, a huge number of people, even those who were financially stable before the pandemic, moved out of their expensive houses and instead settled in cheaper houses.
The increased demand for more “affordable” neighborhoods made the rent prices of houses in those neighborhoods surge high. Because the production of houses and land availability was far behind the demand for these houses, finding houses became more challenging than ever for Americans.
In the midst of this chaos in the recent housing market, there isn’t a direct answer to solving the problem. This is because the inflation rates are mostly unpredictable.
With the CPI value (the percent change in the inflation rate) varying immensely from year to year, the house prices are always a variable.