by Tahir Mehmood 
Ways In Which Inflation Affect Property Prices
- Increase In Property Value
- Increase In The Cost Of Borrowing
- High Rise In Rental Rates
The latest trend of House Prices due to inflation
Ways To Profit From The Real Estate When Prices Rise
- Investment Property & Inflation
- Appreciation offsets inflation
Rental properties generate high returns
Wrapping It Up
Inflation is a rise in goods and services rates over a given period of time. In a given market, there are many explanations why inflation occurs. The principal ones are causes of excess aggregate demand and cost-push. The former is a clear example of an increase in demand for such goods and services. As for the above, wage rises, manufacturing costs and the cost of raw materials would also contribute to high inflation rates.
The high inflation in Pakistan makes it seem as if property prices are rising rapidly. Foreigners living and working in Pakistan are permitted to buy or rent properties. The government however needs them to complete certain legal formalities with Pakistan’s Investment Board and Trade Development Authority.
Ways In Which Inflation Affect Property Prices
Inflation has a huge effect on a whole host of industries in a country. The oil, energy and utility markets are the ones most affected. Yet Pakistan real estate investors rarely feel the brunt of this effect in stark contrast to these industries.
Increase In Property Value
As you would imagine, when a high rate of inflation hits the economy, real estate prices will rise as well. The reasons for that are very clear and simple. Since building materials costs will be high, developers will invest more when constructing new properties. This will result in an imminent price spike for new real estate assets. In addition, the existing properties in Pakistan would also increase in value due to a decreased availability of new buildings.
Increase In The Cost Of Borrowing
In general, economy in Pakistan that is experiencing rising inflation is not conducive to securing favorable terms for the loan. In fact, in these circumstances the borrowing costs appear to be very high. The fact that inflation devalues most lenders’ currency causes interest rates to increase. Typically, this is done in an attempt to cover the losses caused by the currency value decline. It is also worth noting that both investors and real estate developers are impacted by this higher borrowing costs. Indeed, most construction firms depend on loans to tackle their projects and higher interest rates would inevitably lead to higher property prices.
High Rise In Rental Rates
The rent rise in Pakistan property is one of inflation’s most prominent consequences. Many people would opt to rent rather than purchase because of the high expense that comes with mortgages. The high demand for rental properties and tenant inflows would cause landlords to increase rental rates. Needless to say, in this economic environment, buying a rental property puts you in an excellent position as renters are more likely to pay higher rents than taking on an unmanageable mortgage.
The latest trend of House Prices due to inflation
In Pakistan’s major cities:
- The average price of a house in Lahore was PKR 10,402 (US$ 73) per sq. ft. in Q1 2020, was up 6.25% from the previous year, but only down 2.89% when adjusted for inflation.
- In Karachi the average house price was PKR 13,158 (US$ 93) per sq. ft. in Q1 2020, was 4.25 per cent higher than in the previous year, but 4.62 per cent lower when adjusted for inflation.
- House prices in Islamabad average PKR 9,985 (US$ 70) per sq. ft. in Q1 2020, up 7.01 percent from the previous year, but actually down 2.2 percent.
There are several more factors influencing house prices in the real economy and the link isn’t as prominent as in our example. Interest rates are one of the other major factors which cause house prices to rise.
When interest rates are low, house buying can be more affordable and demand for homes can increase. If home supply stays stable, and demand rises, then home prices will rise. You will see a more pronounced impact of inflation in large cities where the land supply is often reduced.
The key one is that building costs are a major factor in the item basket which the government looks at when measuring inflation. Higher house prices thus contribute to inflation.
Another explanation is its impact on income. Many investors feel wealthier after a property boom, in fact, because their properties have risen in value and they are spending more money. This translates into increased pressure on inflation.
Ways To Profit From The Real Estate When Prices Rise
Buying a property in Pakistan for investment point of view is not the only way to benefit through inflation, as most flexible real estate investors are conscious. Here are some examples of how you can do this without having to buy a physical asset.
- Enter the Crowdfunding site for real estate.
- Invest in a private equity fund exclusively devoted to real estate investment.
- Invest in a housing market-focused mutual fund.
Investment Property & Inflation
Although inflation is not per se good for real estate, it does provide investors with decent opportunities. During inflation, there are several factors which make investment properties the ideal asset. Here are the most important ones.
Appreciation offsets inflation
The value of real estate is a highly successful buffer against price rises. In reality, Pakistan’s real estate appreciation rate has been consistently above inflation for more than a decade now. While this strategy may not be able to yield high returns when prices rise, it will certainly shield your investment and net worth from the inflation’s devaluing impact.
Rental properties generate high returns
Without a doubt, rental properties are the most valuable assets during inflation. When more people are turning away from loans and start flocking to conventional rental properties, real estate developers will capitalize on the trend by charging more for rent. The high rental income coupled with the low vacancy rates would help the landlords produce a very high return on investment. More significantly, borrowers keeping a fixed-rate mortgage can easily and effectively put their high income into servicing their debt.
Wrapping It Up
If you look more closely at the unprecedented increase in property prices, you’ll find that inflation in the past hasn’t had a very big impact. In fact, rather than being the precursor to rising property prices, it has usually been the opposite. After a property boom, inflation rose.
Inflation return seems likely given the current economic situation in Pakistan. To manage a market that will soon feel the impact of rising inflation, it is important to understand the dynamics of this phenomenon. Head over to Globe Estate & Builder market rates and start searching for properties right now and check out our latest updates regarding real estate trends.
