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. What causes inflation, and does anyone gain from it?

    Learn how inflation affects what you pay for everyday items. Natural disasters, consumer confidence and corporate decisions ... Read Answer >>
  3. How does the law of supply and demand affect monetary policy in the United States?

    Learn about how the law of supply and demand affects monetary policy in the United States. Changing interest rates leads ... Read Answer >>
  4. What is the correlation between money supply and GDP?

    Read about the two-way correlation between the total amount of money circulating in the economy and gross domestic product, ... Read Answer >>
  5. 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 >>
  6. What are some examples of positive correlation in economics?

    Learn the most common examples of positive correlation in microeconomics and microeconomics, including demand and price, ... 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

    5 Ways an Open House Can Actually Hurt Your Home Sale

    Open houses have long been a way to get exposure for a home that's up for sale. But it turns out it may be more trouble than it is worth.
  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. Financial Advisor

    Are We Heading for a Real Estate Bubble?

    Housing prices across the United States have been on a steady rise over the past few years. Does this mean we are seeing another bubble?
  5. Insights

    A Primer On Inflation

    Inflation has a negative connotation, but is it all bad or does it offer some tangible benefits?
  6. 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.
  7. Investing

    What Causes Inflation in the United States

    Inflation is the main catalyst behind U.S monetary policy. But what causes this phenomenon of sustained rising prices? Read on to find out.
  8. Insights

    Inflation's Impact On Stock Returns

    When stocks are divided into growth and value categories, the evidence is clear that value stocks perform better in periods of high inflation, and growth stocks perform better during periods ...
  9. Financial Advisor

    4 Reasons Why Market Correlation Matters

    Learn about how correlation can be used to measure how broader markets move in relation to each other. See how correlation is used to manage risk.
  10. Investing

    Real Estate Indicators For Prospective Homebuyers

    If you want to buy a home but you’re holding out until market conditions show signs of improvement, housing indicators can help point the way.
RELATED TERMS
  1. Supply

    A fundamental economic concept that describes the total amount ...
  2. Housing Bubble

    A run-up in housing prices fueled by demand, speculation and ...
  3. Inflation

    The rate at which the general level of prices for goods and services ...
  4. Law Of Supply And Demand

    A theory explaining the interaction between the supply of a resource ...
  5. Housing Starts

    The number of new residential construction projects that have ...
  6. Money Supply

    The entire stock of currency and other liquid instruments in ...
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center