How Inflation Affects Real Estate Appreciation & What You Can Do About It

Inflation is becoming more and more relevant to modern-day life. Whether it’s food prices, lumber prices, or used car prices, inflation seems to be getting worse. In fact, inflation is at its highest level since 1982. The CPI (consumer price index) inflation levels were recently marked at 7 percent. This means that goods in this “basket” were 7 percent more expensive than they were the year previously.
 

One of the hardest-hit areas for inflation in 2021 was used cars. The average price of used cars rose 25 percent in 2021. This is an astonishing price rise and it made it much more difficult for Americans to find used cars that they could afford.

Real estate has also been heavily impacted by inflation in the last several years. In fact, in 2021, home prices rose a whopping 16.9%. The median home price in 2021 was $346,900. In this article, we are going to break down everything that you need to know about how inflation affects real estate appreciation and what you can do about it.

Inflation and Real Estate Appreciation
 

To put it simply, inflation tends to drive the prices of real estate upwards. This is true for all types of real estate including single-family homes, multifamily homes, commercial properties, etc. It also drives rent prices up.

Property appreciation and rent hikes are a very good thing for real estate investors. This is because investors get to sit back and simply watch as the value of their real estate investments increases as rent increases. In fact, rising real estate prices caused by inflation is one of the primary benefits of being a real estate investor.

Inflation is a price rise that is the result of too many dollars chasing too few goods. As the government continues to print more money, it increases the currency supply. When the currency supply is increasing too quickly, it results in price increases in real estate. This has happened in a very significant way during the COVID pandemic because mortgages rates have been very low and because the government printed trillions of dollars to use as a “stimulus” for the economy.

Because real estate prices tend to increase and keep pace with inflation, many people use real estate as a way to hedge against inflation. When inflation occurs, the purchasing power of each individual dollar decreases, meaning each dollar can buy fewer and fewer things. So for people who keep most of their wealth in cash, inflation can be a serious problem. But for people who invest in hard assets like real estate, inflation can actually help them to build wealth, or at the very least preserve purchasing power and protect themselves financially during inflationary periods.

Inflation and Construction

Although inflation pushes home prices higher, it also pushes construction costs higher. This is because the prices of lumber and other building materials tend to rise in addition to the cost of labor. This means that as inflation rises, real estate development can be more and more expensive.

But this shouldn’t deter you much if you are a real estate investor or developer because the rises in real estate and rent prices can offset rising costs of development. This is especially true if inflation stays high long after the project is completed.

Inflation and Debt

Essentially, debt becomes cheaper as inflation increases. What this means is that inflation makes it easier to repay your mortgage debt as time goes on. This is because the prices of your mortgage remain fixed, but more and more dollars are being put into circulation. Because of this, wages and salaries tend to go up. This means many people have an easier time paying the initial debt they took out as time goes on because they make more money, but their mortgage costs remain the same.

For this reason, inflation can be something that helps people to feel confident investing in real estate because they believe that it will be easier to make their mortgage payments over time. For a lot of real estate investors, this definitely becomes the case. Generally speaking, inflation makes it easier to pay off debt that is fixed and real estate debt is no exception.

Hedging Against Inflation
 

When inflation rates are high, it becomes increasingly important to hedge against it. This is because inflation represents a weakening of a currency. So, if you hold onto a currency and if it becomes increasingly weaker, so too will your financial power. But if you invest in real estate, you will preserve and perhaps even enhance your financial power.

Throughout history, from ancient Rome, to the Weimar Republic in Germany, to Zimbabwe in the last few decades, inflation has destroyed currencies and resulted in currency savers losing their wealth. The highest levels of wealth destruction come during periods of hyperinflation, which usually occur when central banks print extraordinary amounts of currency to try to help keep a struggling economy alive.

In the United States, we are not currently in a state of hyperinflation. Hyperinflation occurs when prices increase more than 50% per month over a period of time. But, just because the United States is not currently in a state of hyperinflation does not mean that we won’t one day get there or that it is not smart to hedge against inflation.

Final Thoughts
 

Inflation has a dramatic impact on real estate. Inflation is bad for renters because it makes rent go up and it also makes housing prices go up which can make it more difficult to buy a house. But, it is great for real estate owners and investors for the same reason. Inflation also makes it easier to pay mortgages off because mortgages rates remain fixed while currency supplies increase in addition to salaries.

Considering the fact that CPI inflation is at 7 percent, it is time for people to start taking inflation seriously. Saving cash in a bank account becomes an increasingly risky long-term strategy as inflation increases. This is because it provides no protection from the weakening of the currency.

Real estate investing, on the other hand, provides ample protection. This is because when inflation occurs, hard assets such as real estate in addition to other inflation hedges, like gold and silver, all tend to increase significantly in price. So, if you are not already invested in real estate, then now really is the time you might want to strongly consider doing it.

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About Ellie Perlman

Ellie Perlman is the founder and CEO of Blue Lake Capital, a woman owned multifamily real estate investment firm focused on partnering with family offices and accredited investors to build and preserve generational wealth. Since its founding in 2017, Blue Lake has successfully acquired and operated multifamily assets across high-growth U.S. markets, completing $1B+ in transactions.

At Blue Lake Capital, Ellie and her team work exclusively with family offices and accredited investors, offering carefully curated investment opportunities that emphasize long-term wealth creation, stability, and risk-adjusted returns. A defining aspect of Blue Lake’s investment strategy is its integration of advanced AI-driven analytics and data science into the entire lifecycle of acquisitions and asset management. By leveraging cutting-edge technology, the firm executes data-driven forecasting on market trends, asset performance, and tenant behavior, ensuring strategic decision-making and optimized returns.

In addition to leading Blue Lake Capital, Ellie is the original founder and host of "REady2Scale - Real Estate Investing" podcast, which provides insights into multifamily real estate, alternative investments, and finance.

Ellie began her career as a commercial real estate attorney, structuring and negotiating complex transactions for one of Israel’s leading development firms. She later transitioned into property management, overseeing over $100M in assets for Israel’s largest energy company.

Ellie holds a Master’s in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.

You can learn more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com. 

*The content provided on this website, including all downloadable resources, is for informational purposes only and should not be interpreted as financial advice. Furthermore, this material does not constitute an offer to sell or a solicitation of an offer to buy any securities.

 
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