The Relationship Between Inflation & House Prices

Inflation is high in the summer of 2022 and it’s impacting almost every area of our lives, from how much we pay for groceries to our ability to buy a house. If you’ve been saving for a home (or if you’re already a homeowner) you may be wondering how high inflation will impact you.

At Addition Financial, we work with first-time home buyers and experienced homeowners every day. Since we’ve been getting a lot of questions about inflation and house prices, we put together this guide to explain the relationship between the two and clarify what happens to real estate during periods of inflation.

Does Inflation Affect Home Prices?

Let’s start with the big question: does inflation affect home prices? The short answer is that it does, but let’s go into a little more detail.

The relationship between inflation and the housing market is not as obvious as you might think because there are other factors that impact the cost of housing, including supply and demand. When there are a lot of houses on the market and few buyers, then housing prices tend to go down because homeowners are competing to attract the attention of prospective buyers. On the flip side, when supply is low and there are many buyers competing for the available houses, prices go up.

That said, it is true that property prices – both for home purchases and rentals – tend to increase in times of high inflation. The same is true of interest rates, so there’s a push and pull where homeowners who want to sell may be able to charge more while also worrying that high interest rates will prevent prospective buyers from purchasing a home.

What Does Rising Inflation Mean for House Prices?

To understand what rising inflation means for homeowners wanting to sell and buyers wanting to purchase a home, let’s look at what has happened to housing prices between June of 2021 and June of 2022.

In the United States, the rate of inflation for the year ending in June of 2022 was 9.1%, a four-decade high driven by the influx of cash from COVID-19 stimulus payments and a related slow-down in production. The price of consumer goods has risen, with some items increasing above the inflation rate, which is based on the collective price of a basket of consumer goods known as the Consumer Price Index, or CPI.

According to Redfin, the average price of a home in the United States increased by 11% between June of 2021 and June of 2022. That’s a rate higher than inflation but not as high as some other products and services.

At the same time, the number of homes sold decreased by 15.8%. The decrease isn’t surprising given the impact that inflation has had on people’s wallets and budgets. People who thought they had enough saved to buy a home may feel uncomfortable spending the money they have saved.

free inflation infographic

What Factors Have Contributed to Rising Home Prices?

We’ve established that inflation can be a contributing factor when housing prices increase but it’s not the only thing that can affect the cost of housing. Here are some other things that have an impact on the price of homes in the US.

Supply and Demand

We’ve already mentioned that supply and demand affects housing costs, but we’ll go into more depth here. Supply and demand plays a role when it comes to the availability of houses. When the supply is high and demand is low, prices go down; and prices increase when the reverse is true.

Supply and demand also applies to lending and mortgages. Most people can’t afford to pay cash for a new home and rely on credit unions and banks to lend them money to do so. When interest rates are low and lenders are willing to extend themselves, it’s easy for prospective buyers to get the mortgages they need. However, when banks get cautious about lending or mortgage interest rates increase, buyers may not qualify for the loan they need or may be unwilling to buy. In such cases, prices need to come down for homes to sell.

Economic Conditions

General economic conditions have an effect on housing prices as well. When the economy is strong, with low unemployment and a positive outlook, people feel comfortable buying homes because they know they have the ability to make mortgage payments. At the same time, lenders are confident approving mortgages since layoffs and unemployment are unlikely. The effect is rising home prices.

The reverse is true as well. When economic conditions are depressed, with high unemployment and stagnant growth (or even shrinkage), fewer people are willing to buy homes and fewer lenders are approving mortgages. In such circumstances, housing prices tend to be low because there are few buyers in the market.

Interest Rates

Interest rates impact property prices in ways that might seem counterintuitive. Let’s start with what happens when interest rates are low. In that situation, the market may be flooded with potential buyers who are eager to take advantage of low rates that make buying a house more affordable. The impact on pricing is not a decrease but an increase. That’s because high demand drives up prices.

The reverse is true when interest rates are high. There are fewer buyers willing to pay the high price of getting a mortgage. Sellers feel the pinch and reduce prices to have a better chance of attracting the few buyers in the market.


It should come as no surprise that the location of any property has an impact on its price in the market. When an area is seen as desirable, there is likely to be a large pool of potential buyers who are willing to pay a premium to live there. Prices will be high – and that may be true even when the average housing price is lower than usual.

When an area is seen as undesirable, then prices are likely to be lower than average and housing is more affordable. It’s common for people who want to flip houses or those who are willing to take on a fixer-upper to take advantage of low prices.

Laws and Taxes

The desire to buy a home is strong for many Americans but tax laws can have a big impact on people’s ability to afford a home. An example is the mortgage interest tax deduction, which has undergone changes.

When people know they can deduct a significant portion of their interest, they’re more likely to buy homes and that can, in turn, drive up prices. For 2022, taxpayers may deduct interest on balances up to a maximum of $750,000, or $375,000 if married and filing separately. Most Americans buy homes under that amount and can take advantage of the deduction.

Is Inflation Good for Homeowners?

Inflation might make some things difficult, with rising prices leaving most consumers feeling a financial pinch. That said, inflation isn’t bad for everybody. It can actually be good for homeowners and landlords.

The primary reason is that inflation drives up housing prices and can increase property owners’ equity. A CNBC report pointed out that in the US, housing equity has increased by a record $1.2 trillion from 2020 to 2022. 

The flip side of all that added equity is that many prospective buyers have been priced out of the market, unable to afford houses at inflated prices. When a homeowner is able to attract a buyer willing to pay a high price, they can walk away with a significant profit.

Will Inflation Cause a Housing Crash?

One of the most important and pressing questions that we’re hearing from both homeowners and prospective buyers is whether high inflation in 2022 will lead to a housing crash. Here are some things that may illuminate the issue.

The first is that the United States’ Gross Domestic Product (GDP) shrank by 1.6% in the first quarter of 2022. Initial estimates were that the GDP would grow at a sluggish rate in the second quarter, which might lead to stagflation – a combination of slow economic growth and high inflation. However, estimates as of August 2022 are that the final GDP numbers for the second quarter of 2022 will show further shrinkage. 

When the GDP shrinks for two consecutive quarters, that’s an indicator that the economy is in recession. However, a Newsweek article pointed out that a lot has changed in the housing market since the housing crash of 2007-2008. Lenders have taken a conservative approach to lending so there are fewer homeowners with adjustable rate mortgages (ARMs) and many homeowners have enough equity to be able to sell their homes and become renters if they can no longer afford their mortgage payments.

We can’t say for sure that there won’t be a housing crash, but current indications and expert opinions are that even with high inflation and a potential recession, it’s unlikely that the housing market will crash. 

Of course, it’s still a good idea to keep an eye on economic indicators and be mindful of what they could mean for you as a homeowner or as a buyer.

Higher inflation has an impact on home prices and has implications for homeowners and prospective buyers alike. While home prices have decreased in the summer of 2022, most experts feel that a housing crash is unlikely. We will of course keep you posted if that changes.

Are you in the market for a new home? Addition Financial has affordable mortgages to help you achieve your dream of homeownership. Click here to read about our mortgage options and apply today.

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