India’s economy is going through a period of inflation, which affects all asset classes, including real estate. The country’s retail inflation in November this year was recorded at 5.88 percent, which is lower than 7.41 percent in September and 6.77 percent in October. While the inflation numbers are down, it is unlikely that the Reserve Bank of India will go soft on its recent hawkish monetary policies.
India’s high inflation is part of a global problem. Inflation in the US and Brazil is at around 8 percent. Other countries such as Zimbabwe reported 285 percent inflation in August 2022, Lebanon’s inflation was at 168 percent, and Venezuela reported 114 percent inflation. Given the high inflation levels everywhere, India is expected to continue to tame inflation with its current monetary policy.
Historically, real estate has proven to be a stable investment even during inflationary periods. Inflation can, in fact, benefit real estate investors as property rental values increase and existing real estate assets appreciate in value. Property prices tend to increase with inflation partly because of the higher cost of construction materials. Inflation has pushed up the cost of construction materials such as steel and cement, leading to an increase in the price of under-construction properties.
This will also affect the price of existing properties because of the reduced supply of new properties in the market. In inflationary times, there are fewer new properties as builders put their development plans on hold, given the rising input costs. This leads to a fall in property inventory levels, therefore, increasing home prices. Potential buyers can get priced out of buying properties because of the high home prices.
Also Read: Financial Planning: Six money lessons from year 2022
Inflation also has a noticeable impact on property rentals, which tend to increase. In an inflationary period, banks increase home loan interest rates to stay profitable, and this increases the cost of borrowing for home buyers. In periods of high inflation, it can be harder than ever for consumers to secure affordable home loan terms. As a result, many have no choice but to continue to rent, driving up demand for rental properties. Tenants are willing to pay higher rents in an inflationary economy than take on home loans at high rates, pushing rent prices up.
There are some positives to inflation for real estate investors. Existing homeowners benefit from it because property values improve during periods of inflation. With a reduced supply, homeowners looking to sell can get a good price for their properties. Real estate investors also enjoy higher returns on their investments during inflationary periods because now they can increase rents and secure higher profits on a monthly basis. Inflation is a good time for commercial property developers as well because office and retail leases go up during inflation. Private real estate returns hold steady during inflation.
While nobody knows how long this inflationary period will continue, prospective investors and home buyers have nothing to fear. The demand for real estate will always exist. According to a Stanford University study, residential real estate is a safe investment haven during inflationary periods. In the study, they found that home prices increased relative to the size of the economy with the inflation of the 1970s. Investors should buy real estate for the long term rather than flipping the property for a profit in the short term. While other asset classes, such as stocks and mutual funds, are negatively impacted by rising inflation, real estate can actually make inflation work in favor of investors by increasing their income. Home buyers can hedge against inflation if they buy property at a fixed home loan rate.
Renting property works against renters in the long term because during inflationary periods, rents tend to increase on an annual basis. On the other hand, buying a house or investing in properties that yield rent has proven to be a good hedge against inflation. With rents increasing across cities, the investments will turn out to be profitable. Real estate is a great investment and offers significant returns over the long term at all times. Investing in income-generating real estate can help you save for retirement or provide extra cash flow to meet your monthly expenses. In fact, there has never been a better time to invest in real estate as the property market is flourishing, with more and more people looking to invest in property. The market is always changing, and the best time to buy is always now.
(By Garvit Tiwari, Director & Co-Founder at Inframantra)
Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making any investment.
>>> ad: Don't Miss Today's BEST Amazon Deals!
Originally Appeared Here
