How Will Inflation Affect The Indian Real Estate Market
The news these days is concerning: inflation is at its highest level in over a decade, the situation is volatile, and the future is uncertain. But what is the true story? Why is inflation such a concern these days, and how can you protect yourself from its negative consequences? The answer is Real Estate.
Have you ever heard someone complain about the fact that two movie tickets and popcorn used to cost Rs.5? They’re referring to inflation, which is the gradual rise in the prices of goods and services. Inflation is the unforeseen and sustained escalation in the normal costs of goods and services over a while. For a better understanding, let’s understand inflation with an example. For instance, take a 30 year back scenario where people could purchase a lavish house for a sum of 20 lakhs. With the same amount, we cannot even think of purchasing a portion of a building. That is what exactly inflation is. It is a slow process that eventually erodes the value and purchasing power of money. This, in turn, decreases your accumulated savings, i.e., accumulated wealth.
How exactly does Real Estate Inflation Work?
As inflation can erode all your accumulated wealth, the year-on-year growth in your accumulated savings must be higher than the inflation rate. If your accumulated savings are escalating at a lower rate or pace than the inflation rate, your savings stockpile will shrink. The value of the rupee today will be lower than what it was at the beginning of the year. The rupee today, thus, will fetch lesser goods and services than it did a year ago.
How does Inflation impact the Real Estate Market?
- For property owners: Inflation is actually beneficial to property owners for a variety of reasons. The most obvious advantage is that the value of your home rises in tandem with the rate of inflation. Because supply is limited and demand is high, sellers can set their asking prices as high as they want and, in many cases, receive offers at or above their asking price. This makes it an excellent time to sell but a very difficult time to buy. Real estate prices will rise in response to the economy’s high inflation rate, as one would expect. The reasons for this are straightforward and straightforward. Developers will spend more money on new properties because construction materials will be more expensive. This will inevitably lead to an increase in the price of new real estate properties. Furthermore, because of the limited supply of new constructions, the value of existing properties will rise.
- For potential investors: If you invest in a property as a leveraged asset, especially with current financing rates so low, you will find yourself paying the same fixed rate even as the value of your property steadily rises. We are not yet seeing financing rates rise in tandem with inflation in this current inflationary market, and as a result, your return on investment (ROI) can be expected to skyrocket.
- Rents will skyrocket: One of the most noticeable effects of inflation is an increase in rental rates. Because mortgages are so expensive, most people will choose to rent rather than buy. Due to the high demand for rental properties and the influx of tenants, landlords will be forced to raise their rental rates. Needless to say, owning a rental property in this economic climate puts you in an advantageous position because tenants are more willing to pay higher rents rather than take on an unmanageable mortgage.
- Borrowing will be more expensive: In general, an economy experiencing rising prices is not conducive to obtaining favorable loan terms. In fact, the cost of borrowing is quite high in these circumstances. Because inflation devalues the currency, most lenders are forced to raise interest rates. This is usually done to compensate for the losses caused by the decline in currency value. It’s also worth noting that the higher borrowing costs affect both buyers and developers. In fact, the majority of construction companies rely on loans to complete their projects, and an increase in interest rates will almost always result in higher property prices.
So, what does this all mean for investors? And how can a real estate investor profit from inflation? The following section will go over these two points in greater depth.
How To Beat Inflation Via Real Estate?
The steady increase in pricing wouldn’t seem challenging if the purchasing power of a rupee increases alongside it, but that’s not the case with inflation.
Thus, individuals must make sure that they earn at a rate higher than inflation. One such earning strategy is investments. Investment in real estate to combat inflation is one popular option available as it appreciates against a currency during inflationary times. Apart from real estate, gold, commodities, and stocks in the consumer goods segment usually offer a good hedge against inflation in any portfolio.
Real Estate – How Is It A Hedge Against Inflation?
Real estate has the potential to increase or at least maintain the value of accumulated wealth over time, thus providing a hedge against inflation. Three aspects that make real estate a great tool against inflation are:
- Appreciating value
- Increasing income (rents)
- Depreciating debt (if the property is financed)
- Appreciating value:
One of the best aspects of real estate is the appreciation for the investment value. The asset’s value appreciates and produces substantial amounts over some time. For example, you can consider an investment of 30 lakhs on a real estate property. Assuming that property value appreciates by 6% annually for ten years from now, you can reap a final yield value of 53 lakhs at the end of 10 years.
- Increasing Income (rents):
The remarkable aspect of investing in real estate, especially commercial real estate, is the cash flow generated from tenants. Investments in rental properties cover your monthly expenses, including your principal loan balance, interest, taxes, and insurance (PITI), but also generate enormous cash flow in the form of rents regularly. Also, rental properties, if managed wisely, can garner rent escalations annually, generating even more cash flow than your original investment. With this, you’re combating inflation that may occur, which can affect your taxes, insurance, maintenance, and various other costs.
- Depreciating Debt:
Just as your real estate asset is appreciating, the debt that you owe (i.e., if you take any) on the property will depreciate with inflation. When you use leverage or funding to invest in real estate, you get to experience this advantage of depreciating debt. Of course, your monthly repayment will be the same payment per month after year (assuming it to be an amortized loan). But, the value of that payment will fall as time goes on. So, this accounts for a positive outcome of inflation.
Owing to so many benefits, real estate stands apart as an anchor against inflation and helps people survive the inflation tide.
The Bottom Line
Many people do not understand the impact of inflation completely and may step forward unwisely. Hence, they must equip themselves with the requisite knowledge, which will serve as an aid in protecting their wealth from any erosion. One of the best ways to fight and win the game against inflation is through inflation hedge investments like buy-and-hold real estate properties.
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Real Estate Inflation FAQs:
Inflation is the sudden increase in the normal prices of goods and services over a period of time.
Real estate, gold, commodities, and stocks in the consumer goods realm typically offer a good hedge against inflation in any portfolio.
3 aspects that make real estate the best to option to beat inflation are:
- Appreciating value
- Increasing income
- Decreasing debt
Yes. The best aspect of real estate is the appreciation in the value which is actually higher than inflation. The asset’s value appreciates and produces huge amounts over a period of time.