Is There a Correlation Between Inflation and Home Prices?

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 the money supply causing 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 causing house prices to increase is interest rates. When interest rates are low, buying homes can be more affordable 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 related reading, see: The Truth About Real Estate Prices.)

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