The real estate sector is also considered a less volatile alternative to the economy, therefore real estate becomes a defensive option against inflation
Real estate is one of the best options you can choose to invest and protect your capital from inflation, or an inflationary crisis. Unlike other assets that depreciate over time and are victims of the consequences of rising inflation in the country, the real estate sector is one of the assets that performs best with rising prices.
And due to the current situation of the country’s economy, after the health crisis caused by COVID 19, multiple investors have focused on diversifying their capital in real estate, since many other sectors were severely affected by the global crisis.
Therefore, it becomes extremely important to know how inflation affects housing prices and the real estate market, since it will help you know how to invest.
First and foremost let’s understand very well what inflation is and what its effect is on the country’s economy.
Inflation is defined as an economic process caused by the imbalance between production and demand; it causes a continuous increase in the prices of most products and services, and a loss of the value of money to be able to acquire or use them.
This means that the services and products that we bought with a certain amount of money in the past, must now be purchased for a larger amount. The higher the inflation, the less value our money has.
What is its effect on real estate?
And perhaps you are wondering how inflation has an impact on the real estate market, with the increase in inflation we observe that consumer prices are increasing, mainly these prices are affected in the basic baskets or in purchases of the day to day.
Generally in real estate it is affected in:
- Higher mortgage rates
- Increase in asset prices
- Devaluation of long-term debt
- Rise in construction and more
As the cost of production increases, the sale price of real estate increases. In fact, according to the INEGI (Mexican: National Institute of Geography and Statistics) reported that the INPP (Mexican: National Producer Price Index), which measures the variation in the value of nationally produced goods and services, increased in July the last time to 10.08% at annual rate.
Regarding the index corresponding to the group of materials used in construction, an increase of 15.55% was registered in July compared to the period of 2021.
However, at this very moment there is an appreciation of the house above inflation, which causes properties to increase in value over time.
In fact, the real estate sector is the third best performer, only behind the high-flying energy and financial sectors. Investing in real estate even in times of crisis will always be a wise decision.
And the reason for this is really very simple, because although construction prices rise at the same time as inflation, the value of the properties you own will also rise. It is the perfect and infallible formula to protect your investment.
The land will never depreciate, but on the contrary, it will increase according to inflation rates, so your initial investment will appreciate. In addition to that your heritage for your family will grow and you will ensure a completely full and relaxed retirement.
Inflation as a financial ally
There are two ways to generate profits during periods of inflation and by investing in real estate:
BUY PRE-SALE
By selecting the right developer and cost, the price of the house should increase to reflect the higher costs and thus increase the price of the property.
GET FIXED RATE DEBT
The concept of ‘debt’ may sound a bit contradictory in inflationary times, but this allows you to ally yourself with the government in an inflationary context and benefit from the same economic situation.
By owing nominal pesos and these lose value year after year, your property appreciates, while in real terms the debt goes down all the time. In other words, monthly interest remains constant, while rents rise.
Increased rents provide higher «cap rates» (return on investments) or, most likely, an increase in real estate property value.
*Even if your property is not a rental, the benefits of increasing rental property values will also affect your property and those around it.
In an inflationary market, the dollar of interest charged is actually worth less this year than last. This can push up the value of your property. By far, supply and demand is the most important factor in keeping real estate values up with inflation because real estate is a finite resource.
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If supply and demand remain the same and the money supply increases, the price of goods will increase.
As we have observed throughout this note, investing in real estate not only protects your money but also makes it grow. Real estate even in times of pandemic is your best option to diversify your investments and minimize the risk of losses.
Investing in real estate is and will continue to be a viable option to protect assets from the uncertain economic environment in which we find ourselves.
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