How does inflation impact the value of my property?
As consumers of goods and services in South Africa, we are experiencing the prices of basic consumption goods going up every day. This effect in plain terms is inflation in action and it’s having a negative impact on our lives. But what does inflation really mean, and how will it impact an already active housing market, with high demand and low supply? To help understand how your property can be impacted by inflation, it's important to first define inflation and then consider its impact on existing homeowners and new home buyers.
What is inflation?
Inflation refers to a decrease in the purchasing power of your money and it is reflected in an increase in the price of goods and services in the economy. So, as inflation ticks up, every rand you earn loses value and therefore limits your ability to spend.
While the SA housing market is already seeing short supply and high demand before 2020, it is safe to say that the pandemic’s arrival exacerbated these trends, with the sharp decline of interest rates and the utility value of homes increasing. Many tenants are looking to enter the housing market in search of a home of their own and equally, homeowners are seeking opportunities to trade up and increase their space. As this increase in demand continues to take shape, we also see many existing homeowners staying put, therefore limiting the supply of available properties. This has resulted in a housing market inflation, in which the constrained supply and high demand at work, add fuel to an already raging fire and a period of real house price growth will emerge.
How does inflation impact the property market?
For existing homeowners, for the reasons mentioned above and others, inflation is actually a good development for property owners. The most obvious benefit is the fact that in general, the value of your home rises with the inflation rate. With housing supply low and demand high, homeowners in the house price segment of R750k to R2m can shoot for the moon with their asking prices, and in many cases, receive offers for or even above their asking price. This makes it a great time to sell, but a much more difficult time to buy in this price bracket. Especially when the property is in a well-sorted location with great amenities and accessibility.
The sentiment is similar for investors who are invested in a property as an asset, with interest rates at their current low, investors will find themselves paying off a property that is appreciating in value beyond the rate of inflation which will see the property’s value steadily rise.
For aspiring new homeowners, the circumstances for them in an inflationary market are very different from those for existing homeowners. With that reality in mind, the most important factor for prospective homeowners is timing. How long do you plan to own the property you want to buy and is it your primary residence? If you are in it for the long haul, then you should expect the same value increases that existing homeowners are experiencing.
If you are looking at a shorter investment time horizon, much like a speculative investor looking to buy and quickly flip the property for a quick profit, then you should be cautious.
One of the dangers of short-term investing in an inflationary real estate market is the risk of getting caught in a real estate bubble. The cost of buying the property at 7% of the price of the house could wipe away any short-term profit quickly.
What to do next?
As we continue to navigate the uncertainty of the SA economy and the rate at which inflation will increase in the short term. One thing is certain, buying property in the right price range (R700k to R2m) and at the lowest cost of acquisition via a new residential development, is a credible defensive way of ensuring a high inflationary environment works to increase the value of your property.