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 International Chamber of Commerce define the term 'Free on Board' (FOB)?

    Find out more about the International Chamber of Commerce, Incoterms rules and how the International Chamber of Commerce ...
  2. What are the primary factors that drive share prices in the chemicals sector?

    Learn about the primary factors that drive share prices in the chemicals sector. Chemical stocks combine aspects of cyclical ...
  3. What determines if an international trade is Ex Works (EXW) or Free on Board (FOB)?

    Find out more about the Incoterms rules and what determines if an international trade agreement is an ex works or free on ...
  4. What does the rule of 70 indicate about a country's future economic growth?

    Find out more about the rule of 70, what it measures and what it indicates about a country's future economic growth rate.
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. Economics

    Venezuela: Portrait of a Country in ...

  2. Economics

    Putin Says Russian Economy Healing - ...

  3. Economics

    How the UK Makes Money

  4. Stock Analysis

    Best ETFs for Inflationary Worries

  5. Economics

    Gambling on Macau: Too Risky?

Trading Center