by ZeeShan Kahloon 
Pakistan’s inflation rate remains high. The country’s overall inflation, as measured by the Consumer Price Index (CPI), reached a 24-month high of 13% in January 2022, as prices for practically all goods and utilities continued to rise.
With inflation on the horizon, many real estate investors are concerned about the impact on their assets and businesses. Consumer prices rise when inflation rises, but what effect does this have on real estate?
Inflation has several real estate-related side effects, including higher mortgage rates, rising asset prices, depreciation of long-term debt, increased building costs, and more. Let’s take a deeper look at how inflation affects real estate assets and mortgages, as well as how Pakistani investors might position themselves in an inflationary market.
Inflation And Business Sector in Pakistan
Pakistan is in an inflationary spiral, with a frightening double-digit inflation rate now averaging 10.9 percent, compared to the suggested 2-3 percent. As a net importer of oil – and now food – Pakistan is subject to price fluctuations, which drive inflation.
The cost of raw materials fluctuates often in a country that relies on imports. Importing food appears peculiar in the case of Pakistan, which is predominantly an agricultural country. However, a major lack of emphasis on the agriculture sector over the years has pushed the country to the point where wheat is being imported.
Inflation’s impact on real estate investors
Inflation can cause asset prices to rise. In general, when inflation rises, so do the prices of homes and other real estate assets. However, as mortgage rates rise, this tends to exert downward pressure on real estate demand since debt becomes more expensive.
Is real estate resistant to inflation?
Inflation works nicely with real estate. This is due to the fact that when inflation rises, so do property prices and the amount a landlord may ask for rent. As a result, the landlord will earn a bigger rental revenue over time. This aids in keeping up with the growth in inflation.
There are two ways to make money in real estate when prices rise:
- Investment property & inflation
- Inflation is compensated by appreciation.
How Inflation Affects Property Prices
Inflation has a significant impact on a variety of businesses in a nation. The oil, energy, and utility markets are the worst hit. In sharp contrast to these businesses, Pakistani real estate investors seldom bear the brunt of this influence.
House prices in Pakistan are rising as a result of the country’s high inflation rate. In nominal terms, property prices in the country are anticipated to rise 5.05 percent to Rs 10,875 per square foot in 2021. Furthermore, in order to moderate the country’s inflation rate, prices fell to 3.98 percent throughout the same time.
Property Value Increase
As one might expect, when the economy experiences a high rate of inflation, real estate values rise as well. The reasons behind this are straightforward and straightforward. Because building materials will be expensive, developers will invest more while creating new properties. This will result in a price increase for new real estate assets.
Furthermore, because of the restricted supply of new structures, the value of existing properties in Pakistan would rise.
Construction Expenses Grow As A Result of Inflation
Because goods get more expensive with inflation, the cost of building materials will climb as well. There’s a lot that goes into real estate construction, and all of those prices will likely rise when inflation takes hold.
Inflation is commonly believed to raise wages, machinery costs, and building supplies. It also places developers and investors in a situation where cost overruns are far more likely. If you planned a construction project several years ago in an inflationary climate, you must account for the inflation of all building supplies and labor.
Rental Rates That Are Skyrocketed
Rent increases in Pakistani real estate are one of the most visible repercussions of inflation. Because of the high cost of mortgages, many people would prefer to rent rather than own.
Landlords would raise rental rates due to increasing demand for rental units and tenant inflows. Needless to say, in this economic climate, purchasing a rental property puts you in a great position since tenants are more willing to pay higher rents than take on an unaffordable debt.
Characteristics of Real Estate Investment During Inflationary Periods
During periods of rising inflation, owning real estate provides a lot of advantages. First and foremost, property prices will rise in lockstep with inflation. Furthermore, when fewer real estate development projects are undertaken as a result of increased labor, material, machinery, and other expenses, property supply falls, resulting in further price hikes.
Second, inflation raises all prices, including rentals. Occupancy rates often surge when home production slows and demand for existing units grows. In such circumstances, landlords boost rents, resulting in more income (and increases property value).
There Is A Severe Shortage of Affordable Housing
Pakistan’s housing shortfall is estimated to be approximately 10 million units. According to the State Bank of Pakistan, this means that more than 33% of the country’s 32 million families do not have adequate housing. Worryingly, assessments are causing the housing stock to grow by 200,000 units on a continuous basis.
There are several reasons behind Pakistan’s housing shortage. These include:
- The inaccessibility of a typical record of property and title
- Banks’ reluctance to expand their home loan portfolio due to powerless agreement authorization and the vulnerability of entitlement deeds.
- Strict guidelines for site improvement
- Restricted financing has evaluated out lower-to-center pay sections
In Pakistan, the fair housing cost to income ratio is 20:1. According to the State Bank of Pakistan, this is far worse than the global average of 5:1. As a result, the majority of the nation’s urban population lives in slums and vagrant communities.
Globe Estate, the best dealer of real estate in Pakistan, is soon launching New Metro City Gujar Khan project that will offer affordable residential and commercial properties.
Pakistan Property News and Updates 2022
To mitigate the economic impact of the pandemic last year, the government of Pakistan lowered interest rates and announced incentives for investors and businessmen, resulting in the development of many budget-friendly real estate projects in which investors had invested heavily for a variety of reasons. This impact may be observed continuing into this year.
Many Pakistani nationals and foreign Pakistanis are investing in the real estate market, which is now the most successful sector in the country. Real estate investment in Pakistan in 2022 is being promoted more than any other sector due to the rewards and benefits.
The Bottom Line
Given that an inflationary climate typically leads to increased rents and asset values, real estate is seen as an excellent inflation hedge. This is because of three general phenomena:
- Rent increases with inflation.
- The debt on your asset depreciates as the value of the loan declines.
- Your property’s worth grows in line with inflation.
However, investors should be cautious in high-inflation conditions, partly because borrowing costs will rise, placing downward pressure on cash flows and demand for real estate if you wish to sell. It also raises the expense of new real estate development.
An inflationary climate may be beneficial to real estate investors if they make wise acquisitions and stress test their portfolios against inflationary pressures such as increasing interest rates.
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