The power of inflation (or deflation!)

The erosion of purchasing power (inflation) occurs when the general level of prices rises. Changes in anticipated inflation can have a significant impact on Real Estate. Changes in perceptions of long term inflation often cause mortgage interest rates to rise, affect affordability and therefore prices of property.

Inflation and appreciation affect yield rates in different ways, though their affects on future values are similar. Assuming that the risks associated with a property remains the same, appreciation has no effect on yield rates.

Unexpected inflation cause yield rates to move upward as nominal rates of return adjust up. Indicators of inflation include the consumer price index (CPI), wholesale price index, and the Gross Domestic Product (GDP) implicit price deflator.

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