Macroeconomics: Relationship between Inflation Rates and the Housing Market

622 Words3 Pages
The relationship between inflation rates and the housing market is difficult to grasp, but one can introduce this paper with the general assumption that, given all the different elements that are part of the construction process, as well as many of the correlated services such as insurance, there is some positive correlation between inflation and the housing market, notably in that inflation can bring the prices of the houses upwards. As far back as 1975, theoreticians pointed out to the fact that inflation brings swings in construction activity and negatively impacts the turnover for the houses that have already been built (Lessard, Modigliani 1975). There are several tings that can be analyzed in this case. First, inflation brings swings in construction activity because it increases the cost of materials, as well as potential associated costs, such as the cost of transportation. Another interesting perspective on the impact inflation has on the housing market is given by the distorted decisions that customers make under the influence of inflation (Hellerstein, 1997). A potential negative correlation could be perceived whereby perceived higher rates of inflation would lead to purchases of houses that would boost the housing markets. There are two explanations for this. On one hand, anticipating an inflationary trend can force a consumer to purchase a house because of his understanding that the market is likely to go even higher than it currently is. On the other hand,
Open Document