The second quarter has seen an increase in commodity prices, with the inflation rate reaching double digits. As a result of the rising costs and growing housing scarcity, the real estate market has been positively influenced, and buying apartments in Karachi is difficult.
People seek inflation-hedging assets in the real estate market, which has historically performed well in such conditions.
Is Inflation a Real Thing?
Yes. It is and people are quite worried about it. But real estate property is something that wil not affect most people which is why it is necessary for you to understand.
Consumers are losing buying power as the cost of products and services rises, referred to as inflation.
As the rate of inflation rises, the purchasing power of your current savings diminishes. As a result, inflation may be defined as the rate of change in prices over a certain period.
Causes of Inflation
Compared to other industries, inflation has had a primarily favorable effect on real estate. When inflation rises, real estate investors are the ones who reap the most considerable benefits. Historically, this is the case. People with lesser incomes have been particularly hard hit by this time of rising inflation.
The International Monetary Fund (IMF) predicts that inflation in underdeveloped nations will rise to 11.5 percent this year and 7.5 percent in wealthy countries on average.
Global inflation has risen as a result of many causes, including the conflict in Ukraine and supply chain disruptions throughout the world. The world’s yearly inflation rate has increased to the most excellent level since 1981 due to these two variables.
There are many variables that contribute to Pakistan’s high inflation, including the country’s current balance of payments (BOP) issue.
The government had no choice but to turn to the IMF for assistance in dealing with this problem. The IMF, on the other hand, has yet to approve the country’s loan tranche, which has caused inflation to spike even higher.
Recently, the government has also raised the price of power and petrol. In addition, the rise in commodity prices has influenced a wide range of sectors throughout the nation.
Inflation Impact on Real Estate Market – Buying Apartments in Karachi
Compared to other industries, inflation has had a primarily favorable effect on real estate. When inflation rises, real estate investors are the ones who reap the most enormous benefits. Historically, this is the case. People with lesser incomes have been particularly hard hit by this time of rising inflation.
Most investors utilize real estate as an inflation hedge during times of high inflation since it gives more protection than other assets like equities, gold, crypto, etc.
As a reminder, this time may be both beneficial and detrimental for certain people. We’ve included a list of some of the good and bad things that may happen as a result of inflation below.
Property Appreciation
According to recent statistics on real estate, house values have skyrocketed over the last several years. One million rupees may now be worth 5 to 6 million rupees, for example, if one had purchased a house in 2018.
The return on a real estate investment would have easily outpaced inflation if we assumed this increase in property value and used it as a benchmark. It will become easy for us to buy property now and then wait for the right time.
You must, however, exercise caution while making real estate investments since failing to do so might lead to a loss of capital. Real estate investing does not function well in the near term because of the time it takes for the property’s value to rise. To make money in the long term, you must keep the properties for an extended period.
Increase in Rents
Just like other commodity prices, rental rates tend to increase with rising inflation as well. This happens due to the increase in the demand for rental properties, as there is a decrease in the purchasing power of people.
Regardless of the currency’s value and inflation rate, property owners with rental income will be able to pay for the increase in expenses.
Negative Impacts of Inflation on Real Estate
Rising Cost of Construction
Construction materials like cement, steel and other building materials are all seeing their prices rise. This hurts real estate. The cost of building a home or a structure has substantially increased as the costs of these materials have increased in step with inflation.
Borrowing costs have risen.
When inflation rises, most central banks raise interest rates. People who are trying to get a loan to buy a house will be affected by this. Building a new home will be more challenging in an inflationary climate due to the rise in financing and construction expenses.
Best Real Estate Investments in Inflationary Environment
Rental properties are among the few assets that do better than others regarding real estate investments. Even with current worldwide inflation, demand and returns are expected to be more decisive for residential and commercial properties.
Investments in REITs (Real Estate Investment Trusts) are another option for diversifying your portfolio.
Closing note
It is important to note that although property investments might shield you against inflation, they are not a short-term plan. You need a long-term strategy since property values will only rise in the next four to five years. If you plan to buy apartments in Karachi, now is the right time to do.
If you look more closely at the unprecedented increase in property prices, you’ll find that inflation in the past hasn’t had a tremendous impact. In fact, rather than being the precursor to rising property prices, it has usually been the opposite. After a property boom, inflation rose.
Inflation return seems likely given the current economic situation in Pakistan. To manage a market that will soon feel the impact of rising inflation, it is crucial to understand the dynamics of this phenomenon. Head over to a real estate property expert for rates while buying apartments in Karachi and book the best property in Pakistan before it’s too late.