The Effect of Inflation on Housing Prices

The Effect of Inflation on Housing Prices

Everyone knows that inflation is one of the greatest factors that is affecting majority if the purchases. But it as fact that price of all commodities is not influenced uniformly. Practically, there is no direct link between real estate prices and inflation. It, however, is one of the primary factors that lay a vital role in influencing the rates of properties.

When inflation is high in the market, RBI may refrain or increase from decreasing the repo rate which is rate through which money is lends to the banks. This makes higher credit cost. Thus, the home loan interest rates are expected to remain high.

Generally, people become unfavorable to any kind of debt which includes applying for home loan when the interest rate rises. This could result in deduction in rates due to the fear of developers to severe business slowdown. Eventually, this may induce property developers to cut down on the cost or bring in some innovative pricing strategies to recover buying sentiment.

Not necessary to have price drop

The developer, however, could uniformly hike the prices if cost of construction, land and inputs i.e. cement or steel increases. Inflation, to this extent, does affect the prices. The increase in prices, also, depends on demand and supply ratio in that particular micro-market, besides connectivity, amenities and of course infrastructure.

The real estate industry in India has seen a period policy paralysis as well as the slowdown in buying. Inflation results in further slowdown of the real estate industry as developers push their cost to customers, therefore, increasing the prices of property. There are not much buyers in the market who would invest in buying a home during inflationary period.

Experts believe that the rates of homes are expected not to increase even if there is a rise in the input cost. As for example, between 2011 and 2015, the rates of real estate in various micro-markets have either stayed stationary or have fallen although there have been inflationary pressures in the input costs.

On the other hand, the realty market could witness inflation despite no fluctuation in the input rates. In the overall cyclical phase the prices of real estate is tend to increase irrespective of the cost

In most if the cases, the developers don’t reduce the rates when inflation decreases demands as they have a better capitalization though the rates are not increased either. A long span of the inflationary pressures, however, it can lead to an increase in rate points, as it creates pressure on borrowing the cost directly. To sum up, the core cost of the inputs such as steel, labor and cement coupled with various other costs like finances and land acquisition which has led to the significant growth in the rates across various markets across the country.