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Inevitably, inflation affects almost every sector. As a result, prices continue to rise over time, including property prices. In the U.S., the Consumer Price Index (CPI) is the main measure of inflation. This index tracks the price changes paid by consumers for the goods they purchase.
The latest CPI data shows that inflation is once again on the rise. The U.S. Bureau of Labor Statistics released data showing that over the past year, the index for all items increased by 2.4 percent before seasonal adjustment.
It is important to note that inflation occurs globally. In the UK, annual house prices have continued to rise since the end of 2028. According to the Office for National Statistics (ONS), house prices in England rose by 9.6% year-on-year between 2021 and 2022.
However, in practice, not all products experience the same price changes. Not all goods move in line with the average inflation rate. This includes property prices. It is true that inflation affects property prices, but the changes do not always follow the overall inflation trend.
Inflation vs Property Prices
Property prices have historically increased over time. In fact, property prices have often outpaced inflation. This means that property has become more expensive, even after adjusting for inflation.
Since 1963—the first year the Federal Reserve Bank of St. Louis had data on U.S. housing prices—the Consumer Price Index rose from 30.44 to 303.294, an increase of 896 percent. During the same period, the median sale price of a house rose from $17,800 to $436,800, an increase of 2,353.93 percent.
This data shows that home prices have increased at a much higher rate than inflation. Additionally, most rental prices tend to follow the rate. However, inflation is not the only factor driving up property prices.
Drivers of Property Prices
While inflation is a major driver of rising property prices, it is not the only one. Supply and demand are also key factors. Today, available land for property is limited, while the population has significantly increased over the past century. As a result, property prices have surged.
Furthermore, the pandemic was one of the reasons for the rising costs of commodities, including those used in home construction. For instance, lumber prices increased by 114 persen between May 2020 and May 2021.
Increased demand for home office space and the growing trend of moving from cities to suburbs also led to a higher turnover rate, which can drive up housing prices.
Massive infrastructure development in a region can also raise property values due to improved accessibility and amenities. In addition, property being an investment asset makes it attractive—many investors are willing to wait until they can sell at the best price.
The Impact of Inflation on Property Prices
It’s clear that inflation not only causes property prices to soar but can also make them—at times—unreasonable. Although wages may rise, the faster increase in home prices means purchasing power decreases. This has a significant impact on today’s younger generations, namely Millennials and Gen Z.
When property prices rise faster than income and inflation, it becomes difficult for young people—especially those just starting their careers—to own property. Many are forced to take out long-term mortgages (20–30 years) to be able to pay off a home.
Eventually, inflation also affects rental property prices. Since rent tends to follow the inflation rate, rental costs may feel more stable compared to rising home prices. However, this also means tenants remain “stuck” in the rental cycle without building asset equity.
In the end, the widening gap between the ability to own a home and the rate at which prices rise has become a serious and difficult challenge for many people.
