What Happens to House Prices During Inflation?

When inflation starts knocking on the door, the ripple effect is felt across all sectors of the economy. One aspect that often puzzles investors is understanding what happens to house prices during inflation. 

Inflation, the sustained increase in the general price level of goods and services, has significant implications for various aspects of the economy. One area that captures considerable attention during inflationary periods is the housing market. House prices, being one of the most substantial investments for individuals and families, often evoke questions and concerns about their behaviour in the face of rising prices.

The relationship between inflation and house prices is a complex and multifaceted one. While inflation can have positive and negative effects on the housing market, its impact is influenced by many factors, including economic conditions, government policies, and market dynamics.

With that in mind, let us delve into the fascinating world of inflation and its impact on house prices, exploring the factors that shape this relationship and the potential implications for homeowners, buyers, and investors.

The Inflation-House Price Nexus: Unravelling the Complexity

Inflation is a double-edged sword. On one side, it erodes your purchasing power; on the other, it inflates asset prices. What does inflation do to house prices? To put it simply, house prices can increase during inflation. This isn’t a single-fits-all scenario.

In the short term, inflation can lead to an increase in house prices. When prices are rising, people want to buy homes before prices go up. This can lead to a bidding war, which can drive up prices.

In the long term, inflation can also lead to an increase in house prices. This is because inflation can lead to a rise in the cost of building new homes. When the cost of building homes goes up, it becomes more expensive to build new homes, which can lead to an increase in the price of existing homes.

Inflation doesn’t always lead to increased house prices. In some cases, inflation can lead to a decrease in house prices. When the value of savings decreases, people may have less money to spend on housing, which can lead to a decrease in demand and a decline in prices.

Seeing is Believing: The Housing Prices vs Inflation

Housing prices and inflation have a complex relationship. Housing prices generally rise in line with or faster than inflation. Several factors contribute to this, including:

  • Supply and demand: Housing is a fundamental need, and as the population grows, the demand for housing increases. This increased demand and limited housing supply in certain areas can drive up prices.
  • Interest rates: When interest rates are low, borrowing money to finance a home purchase becomes more affordable. This stimulates demand for housing and can lead to price increases. Conversely, when interest rates rise, borrowing becomes more expensive, dampening demand and slowing down price growth.
  • Perception of housing as an investment: Many view homeownership as a way to build wealth and secure their financial future. As a result, people are willing to pay a premium for real estate, which can drive up prices. The perception of housing as a reliable long-term investment can increase demand and contribute to price growth that surpasses inflation.
  • Local market dynamics: Housing markets can vary significantly from one region to another, and factors such as population growth, job opportunities, and local regulations can substantially influence prices. In some cases, housing markets may experience significant price increases due to factors specific to a particular area, even if overall inflation remains relatively low.

It’s important to note that the relationship between housing prices and inflation is not always straightforward. There are periods when housing prices may stagnate or decline, even as inflation continues to rise. These periods are often associated with broader economic factors such as recessions or financial crises.

Overall, the relationship between housing prices and inflation is complex and multifaceted. Understanding the factors contributing to this relationship is crucial for policymakers, economists, and individuals looking to navigate the housing market effectively.

What Can You Do To Prepare for It?

There are many things that you can do to prepare for inflation, including:

  • Increase your income: One of the best ways to protect yourself from inflation is to increase your income. This can be done by getting a raise, finding a new job, or starting a side hustle.
  • Pay down debt: Debt can make it more difficult to cope with inflation, as you will be paying back your debt with more expensive dollars. If you have debt, focus on paying it down as quickly as possible.
  • Save money: Inflation can erode the value of your savings, so saving money for emergencies is vital. Save at least 3-6 months of living expenses in an emergency fund.
  • Invest in inflation-protected assets: Several assets tend to appreciate during times of inflation, such as real estate, stocks, and commodities. Investing in these assets can help you to protect your wealth from inflation.
  • Enhance your investment strategy: Avoid concentrating all investments on a single asset class. Diversification offers a prudent approach to managing your investments, providing stability and resilience in changing market conditions.
  • Be mindful of your spending: Inflation can make it tempting to spend more money, but it is essential to be aware of your spending. Ensure you only spend money on important items and do not overextend yourself financially.

It is important to note that there is no guaranteed way to protect yourself from inflation. However, by taking the steps above, you can reduce your risk and make it easier to cope with inflation.

Should You Dive into a Home Loan During High Inflation?

Getting a home loan during high inflation has potential advantages and disadvantages. But whether it is a good idea to get a home loan when the inflation rate is high depends on several factors, including your financial situation, goals, and risk tolerance. 

Factors To Consider

Here are some things to consider when making your decision:

  • Your financial situation: If you have a good credit score and a steady income, you can get a reasonable interest rate on your home loan. This will help you to save money on your monthly payments.
  • Your goals: Inflation can work in your favour if you plan to stay home long. This is because the value of your home is likely to increase over time, which will help you to build equity.
  • Your risk tolerance: If you are uncomfortable with risk, you should wait until inflation has subsided before buying a home. Inflation can make it more difficult to afford your monthly payments.
  • The cost of living: Inflation can make a living more expensive, which can strain your budget. If you struggle to make ends meet, there may be better options than a home loan.
  • Your job security: If you are worried about losing your job, wait until the economy is more stable before you buy a home. This is because you may need help making your monthly payments unemployed.
  • Your savings: Having a solid financial foundation before buying a home is vital. This means having a down payment of at least 20% and enough money saved up for closing costs and unexpected expenses.

Getting A Home Loan During Inflation: Advantages And Disadvantages



  • High inflation can erode the purchasing power of income, making it more challenging to afford mortgage payments.
  • Lenders may adopt stricter lending criteria and charge higher interest rates, potentially impacting loan accessibility and overall borrowing costs.
  • Economic uncertainties accompanying high inflation can affect market conditions and demand, potentially impacting the housing market.

If you are considering buying a home during high inflation, it is essential to research and ensure that you are making the best decision for your financial future.

Ready To Invest?

Navigating the world of real estate during inflation can be complex, but with the correct information and a solid strategy, you can make informed decisions that align with your financial goals. Understanding the dynamic interplay between inflation and house prices is crucial whether you’re an Australian expat living overseas or a foreign buyer. Remember, it’s not just about riding the waves but also understanding the tides.

Ready to make strategic moves in the real estate market during inflation? Whether you are an Australian expat or a foreign buyer, you can contact Odin Mortgage today for expert guidance and tailored solutions that can help you navigate the complexities and seize opportunities. 

Let us be your trusted partner in making informed decisions. Get in touch now and ride the waves of the market with confidence.

Get a free Australian mortgage assessment today.

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Frequently asked questions

If you’re planning to buy property in Australia, inflation in the country can impact the cost of your investment. A rise in inflation may increase property prices, but it could also potentially increase rental income.

Generally, higher inflation can lead to higher interest rates, increasing the cost of borrowing for home loans. Considering this when planning a property purchase during inflationary periods is essential.

Typically, real estate is considered a good investment during inflation because property values and the amount landlords may charge for rent can increase over time. However, real estate investment appropriateness depends on your financial situation and risk tolerance.

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