How inflation affects real estate prices

​What goes up must come down. That adage is true when it comes to throwing a ball or hot air balloons, but what about rising prices? History tells a different story. You don't need to be an economist to know that prices for most products are more on a continuum trending upward with only slight and temporary dips. Inflation is a result of supply and demand. When there is greater demand than supply prices will increase. When there is a oversupply of products, the cost typically goes down albeit not necessarily lower than a previous average. Anyone that has filled their vehicle with gas over any period of time knows that gas prices fluctuate with the seasonal ups and downs directly related to usage by consumers and how much is available in the world. Inflation not only affects the price of gas and groceries, but also housing prices. The price of building a new home is related to the supply of construction materials. When the cost of building a new home is prohibitive, there is more demand for existing houses. Which, in turn drives up the sales price of an existing home. Other factors can contribute to home prices such as interest rates or the availability or affordability of low cost financing. Again, supply and demand is what pushes inflation to the record levels we've recently seen. Here is what many in government see as a benefit to inflation: The cost of paying back debt is actually lower when the debt was incurred prior to inflationary increases. If inflation devalues our money by say 10% it means that the debt represents a lower percentage of the income needed to repay it. If inflation pushes prices to 50 or even 100 percent, the pre-inflation debt seems insignificant. That is possibly one reason that many in congress don't seem to be concerned about inflation. One key to surviving inflation is to hold on to assets that rise in value with inflation. Cash is not a good hedge against inflation because it continually takes more of it to buy goods and services. Real Estate, precious metals, and durable goods that remain in demand in any economy historically provide protection better than most liquid assets. While high inflation rates may subside when demand and supply are corrected, prices typically level off but do not decline. That makes investing in real estate, for example, fairly safe. Landlords rarely lower the rents when inflation cools off. A shift to new construction could occur if materials become more readily available, but the existing homes hold their own. Understanding inflation can help you make better choices about what to invest in and how you can benefit from what can be negative affects.