Real Estate is influenced by Inflation

Real Estate has come back from the financial crisis of 2008 and has recovered, and in some areas exceeded, the peak prices of 2006. This trend will continue, as the real estate cycle is currently in the “upward” phase of the overall period. The upward phase of this cycle should be expected to continue for about nine years, or about half of the 18-year overall real estate cycle. What this means for property owners and people who are considering purchasing real estate, is that they should expect to reap the benefit of the dual impact of both low interest rates and low (relatively speaking) real estate prices.

The next driving factor for real estate prices will be inflation. As inflation goes higher, the value of hard assets – gold, commodities, and real estate – will rise. The cycle for inflation is the 54-year Kondratieff cycle, and the upward portion of that cycle has already started. The inflationary cycle, like a rerun of the 1970s, will put pressure on real estate prices throughout the country and probably in the rest of the world. This is good news for the millions of property owners who are currently underwater on the value of their properties (i.e., their mortgage obligations are larger than the current value of the properties). Hopefully, most of those people have refinanced to a fixed-rate mortgage, because interest rates, like inflation, have only one way to go – up!

There will be two trends that play against each other, as the next decade unfolds, with respect to real estate. The first trend will be inflation. Inflation will drive the price of real property – real estate, commodities, and the like – higher and higher over the next several years. The counterpoint to this trend will be interest rates. As inflation goes higher, so will interest rates. As interest rates climb, mortgage payments will increase, so the affordability factor becomes a major issue in people’s ability to pay for more expensive homes and housing in general. This could become a challenge to the overall factors driving prices higher (the demand side), but I suspect that effect will not drag down real estate prices until the mid-2020s.

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