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. Under what circumstances will a government change its monetary policy?

    Learn about the kind of variables, including political and theoretical factors, that can bring about change in a government's ...
  2. How does monetary policy influence inflation?

    Take a deeper look at how contemporary central banks attempt to target and control the level of inflation through monetary ...
  3. How does a cost of living adjustment (COLA) affect my salary?

    Learn how employers add cost of living adjustments to workers' salaries to offset the effects of inflation or to aid in a ...
  4. Why does inflation increase with GDP growth?

    Examine the relationship between inflation and GDP, and why GDP growth leads to higher prices. Explore the effects of uncontrolled ...
RELATED TERMS
  1. Insurance Inflation Protection

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

    Definition of welfare capitalism.
  3. LIBOR

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

    An extended period of economic decline around the world. The ...
  5. Economic Exposure

    A type of foreign exchange exposure caused by the effect of unexpected ...
  6. Heckscher-Ohlin Model

    An economic theory that states that countries export what they ...

You May Also Like

Related Articles
  1. Even though inflation currently seems tame, it's still the worst enemy of retirees. Here are some tips to reduce its impact.
    Professionals

    Tips For Managing Inflation In Retirement

  2. There are many ways to rank the word's most powerful companies. Looking at market value, brand value or sales revenue are all methods used to rank the biggest companies in the world.
    Economics

    Most Powerful And Influential Public ...

  3. A look at China's plan to control population growth and how it could change going forward.
    Economics

    China's One-Child Policy Explained

  4. With the second-largest economy in the world, China has significant (and growing) influence on the global economy. But how is that impact figured?
    Economics

    A Look At China's Growing Influence ...

  5. Quantitative easing in Europe is coming, but too slowly to avert a severe slowdown and perhaps even a hard landing.
    Economics

    How Is Europe Affecting The Martkets?

Trading Center