The Inflation Rate in Pakistan has struck the real estate industry in Pakistan badly. As the year 2022 is progressing commodity prices are increasing, with the inflation rate touching double figures.
The rapid inflation complemented by a reduced number of accommodations for the public has somehow benefited the Real Estate Sector.
In history, the real estate marketplace has been doing well in an inflationary setting. This is because people look for properties that assist as a verge counter to inflation.
Understanding the Concept of Inflation Rate in Pakistan
The term Inflation is used to describe a decline in the buying capacity of people. This is because of the overall increase in the prices of goods and services.
As the price increases, the money its value. It impacts the expenditure capacity. Hence, in general, inflation is the rate change in prices over time.
Inflation can have a significant impact on the real estate market in Pakistan. After the US housing bubble burst, there was a lot of inflation, which was a big reason why the real estate market crashed in 2008.
Inflation caused the value of homes to decline by more than half, making them far less valuable than the mortgage payments that many homeowners were already struggling to make.
People who were already behind on their mortgages lost even more money each month because their homes’ value was decreasing.
Causes Behind this inflation Rate in Pakistan
International Monetary Fund (IMF) claims that inflation is probably going to reach the level of 11.5% in developing countries. Developed Countries will have a 7.5% inflation on average by the end of 2022.
This worldwide inflation is because of many factors. Still, two chief details at the back of this spike are
- The war in Ukraine
- Global supply chain disturbances
These two factors have been pushing the Global yearly inflation rate to the highest level since 1981.
Nevertheless, the situation is unlike in Pakistan. There are many overlying factors involved in this rapid increase in inflation, mainly the balance of payment (BOP) catastrophe.
To confront this, the management had no other choice but to seek out help from the IMF. Yet, the IMF hasn’t agreed on the loan tranche for the country so far. This has caused an acceleration in the inflation rate.
Lately, the government has also increased electricity and fuel prices to manage the balance of payment. Still, this price gush has increased commodity prices, affecting numerous industries in the country.
Inflation Rate in Pakistan- Impact on Real Estate Market
If we consider the Real Estate Sector, the influence of the Inflation Rate in Pakistan is mainly positive compared to other areas. Factually, the increasing inflation doesn’t affect real estate investors.
They are the ones who profit the most from this inflationary setting. The period of high inflation mainly disturbs people in the lower-income range.
In a period of high inflation, maximum investors use real estate as a border compared to inflation. It offers more safety than other resources like stocks, gold, crypto, etc.
However, inflation can also have some negative influences. To simplify the effects of the Inflation Rate in Pakistan, the following are a few important factors.
When we look at property data from the last few years, there is a massive increase in the value of the properties. Let’s understand it with an example if someone had purchased a property with a value of 1 million in 2018, it may have a value of around 5 to 6 million rupees in 2022.
If someone finds the property’s value and compares it with inflation surge figures, they will understand how real estate investment can easily beat inflation.
However, investor has to be smart when investing in real estate so that they don’t invest their money in assets that may not produce improved returns.
It is significant to note that real estate investment does not work efficiently in a short period. It takes time for the property’s value to increase in worth. Investors need to own the assets for some time if they want to produce positive returns in the long run.
Increase in Rents
Same as with other service prices, rental rates also have a tendency to increase with rising inflation. It occurs because of the increase in the demand for rental properties, as there is a reduction in the buying capacity of people.
Irrespective of the currency’s worth and inflation rate, property holders with rental income can recompense for the increase in expenditures.
Negative Impacts of Inflation Rate in Pakistan
Following are some of the adversative effects of real estate due to inflation.
Rising Cost of Construction
One negative influence of the Inflation surge on real estate is the growing prices of all construction resources like bricks, cement, steel, etc. The prices of these supplies move in a cycle with inflation. As a result, the cost of constructing a house or building increases exponentially.
Increased Cost of Loans
Maximum chief banks have a tendency to increase interest rates with growing inflation. This disturbs loan costs for those looking to finance their real estate purchase. With the rise in loan and construction costs, building a new home will be problematic in this situation.
How does the value of capital change with the Inflation Rate in Pakistan?
But we must also think about the capital value part of total returns. Valuers use rents and changes in yields to figure out the value of capital. Inflation expectations affect these yields, which are the “shortcut” of the discount rate that is applied to future income to account for risk and inflation.
Like with bonds, when real estate yields go up, capital values go down, but when yields go down, capital values go up. But real estate yields are not always the same as bond yields.
They are affected by bond yields, but they also show how investors think rents will grow in the future. So, there have been times when bond yields have gone up because people thought interest rates would go up in the future.
At the same time, real estate yields have gone down because rental growth expectations have been exceeded.
Best Real Estate Investments in Inflation Rate in Pakistan
All real estate investments are based on the market. Some investments charge well than others, mainly rental properties. Rental properties include residential and commercial units like the ones in Rehbar Housing Society that are likely to have advanced demand and yields even in this global inflation.
One can also invest in REITs (Real Estate Investment Trusts). They are a decent way of dispensing capital across diverse assets.
While property investments guard you against inflation surge, it is appropriate to indicate that it isn’t a short-term plan. Investors have to plan it for a long time as property prices will only pay back after 4 to 5 years.
To Know more about Investment you should read How to Invest in Real Estate? -Introducing Top Strategies used by Experts.
This is also why you should look into the market before buying something expensive. Ensure that the area you want to buy in is in high demand and that the property’s value is high enough to be worth the investment.
Overall, buying real estate when prices are rising is an excellent way to make a safe investment that will make your property worth more over time.