Inflation and Recession are the two terms which are often used by economic experts when talking about the overall economic development of the country. But, what is inflation? What is a recession? And how does it affect us and the real estate market? Let us take a look at what these two terms mean and how they affect our day-to-day lives and the realty segment.
Economics defines inflation as a consecutive increase in prices of goods, assets and services. Inflation is the condition where the demand for goods and services is more than its supply. More the demand, more the prices soar. If the wages of the working sector increases with ascend in the price of commodities, only then we can be able to maintain a balanced economy. If wages don’t scale up in accordance with the rapidly soaring prices, then the number of people purchasing properties and other commodities may reduce, significantly. Excess of inflation can lead to recession.
Recession is defined as, "A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales”, by National Bureau of Economic Research (NBER). When the supply of goods, services and commodities is more than the demand, this condition of an economy can be termed as recession.
How Does Inflation and Recession Affect the Real Estate Market?
Recovery rate in the realty sector is one of the major factors that affects the Gross Domestic Product (GDP) of a country. To develop a housing project, various aspects need to be considered like the cost of raw materials, maintenance, different allowances, approvals, facilities, amenities and inflation and recession can affect them all. Increases in interest rates can take years to negatively affect the property rates. In a strong economy, the relationship between interest rates and housing prices balance each other since they’re mutually dependent.
Economies that boost growth, may not be negatively affected by inflation and recession. Ever-strengthening economies make it easier for people to opt for apartments and properties with higher prices, including interest rates, since their income tends to increase as well. But, in the case of weak economies, ascend in the income may come to a standstill which may make it difficult to buy properties. In such conditions, home buyers may opt to wait till the rates of properties decline. And this where recession is said to hit the market. Since the growth is stagnant, apparently, the real estate market will witness a downfall in terms of demand which may lead to unemployment and untimely delivery of projects (as the developer may fall short of required funds to complete a project). For example, you can consider the material required for development of a project. A variety material is needed for construction. Wood, cement, concrete, copper, steel, glass, etc., are some of the basic materials required. As the price of these materials soar, as a result, the overall estimate of a project increases. Some developers may opt to keep less profit margin and complete the construction within the given period. But, this happens very rarely. Apart from this, several other allowances and approvals need to be in place before a developer ventures into a housing project.
But, recession can affect the real estate sector positively as well. Since the demand decreases, the prices tend to fall, thus, interest rates on housing loans seems to decrease. And so, it can be considered as one of the best times for real estate investment. Since the rates tend to witness a downfall, people can buy apartment/s during this period and secure it for the time if and whenever inflation hits the economy. People tend to prefer rental housing schemes during both recession and inflation. Any investment in real estate ensures high return on investment. And so, if you buy a house now, it can be a good source of income as well (when given on rent for residential or commercial purposes) in the times of recession and inflation. Real estate is one of the major employment sectors in various economies, globally. Hence, change in the functioning of one can hamper the foundation of the other.
Also, various economists believe that a certain amount of inflation and recession is necessary to boost economic growth and that it’s never too late to invest in real estate. The right to invest in real estate is NOW. Remember, today’s highest price is going to be tomorrow’s lowest. Thus, Will Rogers rightly said, ‘don’t wait to buy real estate, buy real estate and wait.’