An Explainer: Inflation

Inflation is as a general rise in prices.

PropGuide Explains Inflation

Inflation is a general rise in the price level. When we say that there is an inflationary trend, this does not mean that there is an isolated rise in prices. It means that prices have been rising across all market segments.

Inflation has a deep impact on the performance of the real estate sector. For instance, when inflation rises, commercial banks are likely to raise interest rates. Similarly, landlords are less likely to rent out properties if inflation is unpredictable. The reason is that it is difficult to renegotiate agreements with tenants when inflation is high. Real estate investors also adjust for inflation while assessing how real estate prices have risen over years. When inflation is high, it may seem that real estate prices are rising, though in “real terms”, prices are falling.

As inflation makes it difficult for firms to estimate future profits, firms are not likely to make large capital investments. This is especially true of large infrastructure projects that have a long-term construction plan. When infrastructural projects are less likely to be undertaken or completed, real estate investors and home buyers often find it difficult to liquidate their real estate assets or move into their new homes.

Check out PropGuide's comprehensive guide to real estate terms here.

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