In 2020, the Philippines experienced an average inflation rate of around 2.6%. This was lower compared to the previous year, when the average inflation rate was around 2.5%. Due to the COVID-19 pandemic's economic effects, the relatively low inflation rate in 2020 was primarily a result of low oil prices and decreased consumer demand.
However, it's crucial to keep in mind that inflation rates can change over time and depend on a variety of variables, including governmental policies, global commodity prices, exchange rates, and domestic economic conditions. Inflation refers to the general increase in the prices of goods and services over time. When inflation is high, it can impact the housing market in several ways.
How does inflation affect real estate?
Purchasing Power
Inflation erodes the purchasing power of currency over time. When the general price level of goods and services rises, the cost of buying a house also tends to increase. Higher construction costs, increased material prices, and rising labor expenses can contribute to elevated asset prices. As a result of housing costs, potential homebuyers may find it more challenging to afford a house, especially if their income does not keep pace with inflation.
Mortgage Payments of Condo Owners
One thing you must consider before buying is your payment option. Would you rather pay a down payment and make monthly mortgage payments? Or would you rather pay in full? Both situations have their own set of factors. Over time, the value of every property appreciates and the equity increases. The monthly mortgage payment goes down over time and reduces the principal amount of the mortgage. On the other hand, when you think of someone who has a rental property, he has to pay fixed rent and rental fees each month, paying rent back to the owner, and does not have to pay any money as a mortgage.
When inflation is high, central banks often respond by raising interest rates to control and mitigate inflationary pressures. A full mortgage principal and payment is better if you don't have enough to fully purchase the condo unit. You will pay more because of the mortgage interest, but in smaller monthly payments for a few years. Consider your condo payments and also the monthly payments you'll need to make once you've completely paid everything for your condo. Investors without property management may find that those expenses and duties all fall upon them to handle themselves or by hiring subcontractors. Depending on the structure of their home mortgage, owners renting their condo long-term may have to forego their qualification for mortgage tax deductions both on the state and national level. Owners who meet specific standards and consider the property their primary residence can itemize and deduct out-of-pocket property-related expenses and interest on their taxes. The increase in interest rates affects borrowing costs, including mortgage loans, and can have implications for homebuyers in the following ways:
Higher Mortgage Interest Rates
When central banks raise interest rates, it leads to an increase in mortgage interest rates offered by financial institutions. Higher interest rates on mortgages result in higher monthly mortgage payments for homebuyers. This increased cost of borrowing can reduce the purchasing power of potential buyers and make homeownership less affordable, especially for those on a tight budget.
Reduced Affordability
The higher mortgage interest rates resulting from inflation can reduce the affordability of homeownership. The increased borrowing costs mean that homebuyers may qualify for smaller loan amounts or need to allocate a larger portion of their income toward mortgage payments. This can limit their options in the housing market and potentially make it more challenging to purchase a house.
Postponing Homeownership or Exploring Renting
The combination of higher prices and increased mortgage interest rates due to inflation may lead some individuals to postpone their plans to buy a house. They might choose to wait for a more favorable market condition or until their financial situation improves. Additionally, some individuals may opt for other housing options, such as renting, as it may be a more affordable and flexible choice in the short term.
Rental Market
Inflation can impact housing prices, condo buyers, and the rental market as well. When inflation is high, potential homebuyers who are unable to afford a house due to increased prices or higher mortgage rates may choose to buy a condo or rent instead. Increased demand for rental properties can lead to higher rental prices as landlords seek to capitalize on market conditions. Renting a condo vs. a house may become a more attractive option for those who are concerned about affordability or uncertainty in the housing market. Here's how it can influence housing markets and rental market behavior:
Increased Demand for Rental Properties:
When inflation leads to higher asset prices and borrowing costs, potential homebuyers who are unable to afford a house may choose to rent instead. This increased demand for rental properties can drive up rental prices. Landlords may take advantage of the market conditions and raise rent to capitalize on the higher demand for rental housing. You'll have condo association fees, which include fees that cover maintenance costs, amenities, and upkeep of common areas. Renovation costs are a possibility if the condominium development is older and needs major repairs. Property taxes also need to be paid, but that is the same for every property owner. But owning a property requires a lot of maintenance.
Affordability Concerns:
Rising prices and mortgage costs due to inflation can make homeownership less affordable for some individuals. In such cases, renting a house may become a more attractive option, as it offers more flexibility and can be a more affordable alternative. Renting allows individuals to avoid the upfront costs associated with buying a home, such as down payments and closing costs, making it a more accessible choice for those concerned about affordability. You will be playing by your landlord's rules, so make sure to go through each point of your contract thoroughly before making that downpayment. You will also need to consider the security deposit you'll need to pay to your landlord before renting the place.
Uncertainty in the Housing Market:
During periods of high inflation, there can be increased uncertainty in the housing market. Potential homebuyers may hesitate to make long-term commitments to purchasing a property due to concerns about future price stability and the potential impact of inflation. Renting provides a more flexible housing arrangement, allowing individuals to avoid the potential risks associated with buying a property during uncertain market conditions.
Impact on Rental Prices:
The increased demand for rental properties resulting from potential homebuyers opting to rent can lead to higher rental prices. Landlords may adjust their rental rates to take advantage of market conditions and maximize their returns. This can make renting a house more expensive for tenants, especially in areas with high demand and limited rental supply.
Condo Ownership:
Condo for Sale Philippines is a residential complex with several individual units owned and lived in by an individual. Condo owners have access to amenities such as swimming pools and better locations since these buildings are usually located in urbanized areas near places of work, shopping malls, restaurants, etc. Condo unit owners also don't have to worry much about maintenance since these buildings are usually maintained by a property management company. This comes at a cost, as condo payments include condo fees and maintenance costs for property upkeep.
Investment Considerations and Property Taxes
Real estate is often considered a tangible asset that can act as a hedge against inflation. As the general price level rises, property values and rental income have the potential to increase as well. Some investors may view real estate as a way to preserve the value and passive income of their assets during inflationary periods. This increased investment demand can contribute to higher property prices and rent increases, potentially impacting the affordability of buying a house. Here's how the real estate market's average rent can be impacted by monthly rent during inflationary periods:
Preservation of Asset Value:
Real estate has historically been considered a relatively stable investment during periods of inflation. As the general price level rises, property values have the potential to increase as well. Real estate is a physical asset that can provide a store of value, allowing investors to preserve their wealth in the face of inflationary pressures.
Rental Income Potential:
Inflation can lead to higher rental prices. As the cost of living increases, landlords may raise rents to keep up with the rising expenses. This can result in increased rental income for real estate investors, offering a potential income stream that can help offset the effects of inflation.
Increased Investment Demand:
During inflationary periods, investors may seek out real estate as an investment option to protect against the erosion of their purchasing power. The increased demand for real estate investment opportunities can contribute to higher property prices, especially in areas where supply is limited. This increased competition for properties can impact the affordability of buying a house for individual homebuyers.
Diversification Benefits:
Real estate can provide diversification benefits to investment portfolios. During periods of inflation, other asset classes like stocks and bonds may experience volatility and potential depreciation. Real estate investments, on the other hand, can provide a more stable and tangible asset that may have less correlation with other investment types, reducing overall portfolio risk.
It's important to note that the impact of inflation on real estate can vary depending on several factors, including the overall economic conditions, government policies, and local market dynamics. Additionally, individual circumstances and preferences also play a significant role in determining whether someone chooses to buy a house or be a condo owner.
For more information on Vista Residences, email [email protected], follow @VistaResidencesOfficial on Facebook, Twitter, Instagram, and YouTube, or call the Marketing Office at 0999 886 4262 / 0917 582 5167.
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