What effect does inflation have on the real estate market?

In the last 15 years, the real estate market has developed rapidly. Prices have risen significantly and high yields have steadily increased demand for houses and apartments. An excellent investment for investors.

The inflation rate is rising faster than it has in a long time. In October 2021, the inflation rate in Germany was 4.5 percent year-on-year, well above the two percent targeted by the ECB. This rate of inflation is noticeable in the daily shopping basket and especially in oil and gasoline prices. Savings are losing value month by month due to inflation – exacerbated once again by historically low interest rates.

More and more investors are therefore looking for a way to invest smartly without the investment losing value. As a result, the demand for real estate was and is many times higher than the supply. Real estate prices have reached record levels. But what happens to a real estate loan in inflation?

In an inflationary environment, prices rise and so do interest rates on new loans. Those who have concluded a good financing contract, with a long fixed interest rate period of 10 to 30 years, need not worry. However, when this fixed interest rate expires, interest rates could increase so much that the loan can no longer be serviced. Then, in the worst case, there is the threat of foreclosure.

On the other hand, it is important to remember that in inflation almost all prices rise. The investor can therefore also demand a higher rent for his property should an index rental agreement have been concluded. In the case of an index-linked lease, rents are based on the consumer price index. This applies to all private households in Germany. This basically means that your rental income will increase annually with inflation. In this case, the tenant could offset the additional cost of a loan by increasing the rent. In addition, during inflation, investors can more easily repay the loan, because the loan amount remains the same, while the achievable rent increases. This means that the loan can be repaid in a shorter period of time, e.g. with unscheduled repayments.

As you can see, the impact of inflation on the real estate market is limited for investors.

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