Is there a correlation between inflation and house prices?

By Joseph Nguyen AAA
A:

There is a correlation between inflation and house prices - in fact there are correlations between inflation and any good with a limited supply. To illustrate, consider an economy that has a money supply of only $10 and five identical houses in the whole economy. Each house would be priced at $2 (assuming no other goods in the economy). Now, suppose the central bank decides to print more money and the money supply expands to $20. Now each house would be priced at $4. In this simplistic example, increasing money supply causes inflation and house prices to increase.

In the real economy, there are a lot more factors that affect house prices and the correlation is not as prominent as in our example. One of the other major factors that causes house prices to increase is interest rates. When interest rates are low, buying homes can be more affordable for home buyers and increase the demand for homes. If the supply of homes remains constant and the demand increases, then the prices of homes will increase. In large cities where land availability is often limited, you can see a more pronounced effect of inflation. (For more on inflation take a look at our tutorial on Inflation.)

This question was answered by Joseph Nguyen.

RELATED FAQS

  1. How were nominal interest rates in the economy set before the Federal Reserve?

    Learn more about how nominal interest rates are determined, how the Federal Reserve targets them, and how they acted prior ...
  2. What can cause price deflation?

    Learn what price deflation is, how inflation rates can be calculated using the consumer price index and what some causes ...
  3. What is the difference between asset-price inflation and economic growth?

    Read about the difference between asset-price inflation and real economic growth, and why a rising stock market or housing ...
  4. Is a deficit in the balance of payments a bad thing?

    Discover how it might be possible to run a balance of payments deficit, what that means in terms of international trade and ...
RELATED TERMS
  1. Deflationary Spiral

    A deflationary spiral is when a period of decreasing prices (deflation) ...
  2. Negative Interest Rate Policy (NIRP)

    A negative interest rate policy (NIRP) is an unconventional monetary ...
  3. Nordic Model

    The social welfare and economic systems adopted by Nordic countries.
  4. Insurance Inflation Protection

    Insurance inflation protection is designed to allow policyholders ...
  5. Welfare Capitalism

    Definition of welfare capitalism.
  6. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    GLD vs. IAU: Which Gold ETF is Better?

  2. Options & Futures

    Why Gold's Price is More than 'Supply ...

  3. Mutual Funds & ETFs

    These 4 Precious Metals ETFs Help Combat ...

  4. Investing

    What Has Been Groupon’s Growth Strategy?

  5. Economics

    A Ban On SWIFT Could Hit Russia Where ...

Trading Center