Effects of Inflation on real estate in Africa
Real estate is a good hedge for inflation but, unfortunately, it isn’t that simple. Sadly, not all real estate is created equal, and not all inflation is created equal. With inflation rising and economic growth slowing, it is important to understand some of the geographical and sectoral idiosyncrasies that will underpin the relative performance of real estate assets, especially if inflation proves to be less ‘transitory’ that the needed.
Africa mostly has issues of predominant inflations yet economic growth is relatively slow. How does this affect real estate since with slow economic growth, fewer people will patronize? Inflation can lead to;
1 . HIGHER MORTGAGE RATES
Generally speaking, as inflation increases, so too do interest rates. As inflation goes up, central banks typically raise short-term rates to put downward pressure on the inflationary environment. If interest rates are low, more consumers tend to borrow which means they have more money to spend. This moves inflation higher.
As central banks raise interest rates to fight inflation, consumers will tend to save more rather than spend because returns from higher interest rates are more appealing. The hope is that with less consumer consumption, inflation will ease.
2 . HIGHER ASSET PRICES
As this price of things increases with inflation, so too does real estate. Generally speaking, when inflation increases then housing and other real estate asset prices follow suit. That said, because we also see mortgage rates rise, this tends to put downward pressure on demand for real estate because debt becomes more expensive. This can in turn put downward pressure on asset prices as demand decreases.
3 . INFLATION CAUSES CONSTRUCTION COSTS TO RISE
Because things get more expensive with inflation, the cost of materials used in construction will also rise. There’s a lot that goes into real estate development, and all of those prices will generally increase as inflation creeps in.
It is widely understood that inflation increases wages, machinery costs, and building materials. It also puts developers and investors in a scenario where cost-overruns are much more possible. If you planned a build several years ago in an inflationary environment, your costing will need to account for the inflation of all the building materials and labor
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