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 does the law of supply and demand affect the housing market?

    Learn about the law of supply and demand, the relationship between supply and demand and how the law of supply and demand ... Read Answer >>
  2. Does a negative correlation between two stocks mean anything?

    Learn what the concept of negative correlation means, understand how it is generally calculated and see how it is used in ... Read Answer >>
  3. What is the correlation between inflation and interest rate risk?

    Learn about the correlation between inflation and interest rate risk. Central banks raise interest rates when inflation becomes ... Read Answer >>
  4. How is correlation used differently in finance and economics?

    Take a look at the similarities and differences between how statistical correlation is applied in economics as opposed to ... Read Answer >>
  5. How can you calculate correlation using Excel?

    Find out how to calculate the Pearson correlation coefficient between two data arrays in Microsoft Excel through the CORREL ... Read Answer >>
  6. How does correlation affect the stock market?

    Learn about the role correlation plays in prudent stock market investing, and how the correlation coefficient is used to ... Read Answer >>
Related Articles
  1. Investing

    Why Housing Market Bubbles Pop

    Home price appreciation is not assured. Can you withstand the volatility in this market?
  2. Investing

    Correlation

    In the world of finance, correlation is a statistical measure of how two securities move in relation to each other.
  3. Trading

    Cost-Push Inflation Versus Demand-Pull Inflation

    Do you remember how much less you paid for things ten years ago? That’s inflation at work.
  4. Investing

    Understanding the Oil & Gas Price Correlation

    Learn how the correlation between the commodity prices for natural gas and oil changed from 2004 to 2015 due to increased natural gas production.
  5. Trading

    Using Currency Correlations To Your Advantage

    Knowing the relationships between pairs can help control risk exposure and maximize profits.
  6. Investing

    5 Ways an Open House Can Actually Hurt Your Home Sale

    They may be more trouble than they're worth.
  7. Investing

    How Inflation Affects Your Cash Savings

    Prices tend to rise over time and this inflation can cut into the value of your savings. Here are some ways you can manage the situation.
  8. Investing

    Could Higher Correlations Wreck Your Diversification Strategy?

    Rising asset correlations could make your portfolio riskier than you think.
  9. Investing

    8 Signs Of A Real Estate Rebound

    Wondering when prices will start to turn around in your area? We'll show you how to get in the know.
RELATED TERMS
  1. Inflation

    The rate at which the general level of prices for goods and services ...
  2. Housing Starts

    The number of new residential construction projects that have ...
  3. Law Of Supply And Demand

    A theory explaining the interaction between the supply of a resource ...
  4. Inflation Trade

    A method of investing that seeks to profit from an overall increase ...
  5. Headline Inflation

    The raw inflation figure as reported through the Consumer Price ...
  6. Base Effect

    The consequence of abnormally high or low levels of inflation ...
Hot Definitions
  1. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  2. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  3. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  4. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  5. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  6. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
Trading Center