The biggest reason for the link between rising inflation and falling prices in the housing market isn’t due to the inflation itself — instead, it’s the reaction to the inflation. No government will be happy to sit back and watch inflation destroy its country, so we’ve seen the Fed increase its funds rate recently.
When the funds rate is higher, it affects banks, so other interest rates rise to compensate, including mortgage rates. This all helps to discourage borrowing and spending, keeping inflation low — and possibly even resulting in deflation, which is why it could result in lower house prices.
As mortgages become more expensive, it becomes less appealing to take one out in the first place, as we’ve seen already. This situation is a stark contrast to what home buyers faced in the US a year ago.The pandemic saw a sharp rise in people purchasing properties after thinking they had the perfect window of opportunity to get onto the property ladder or move house.
The effect of the rise in the federal funds rate on demand is two-pronged. On the one hand, the higher mortgage prices are likely to reduce demand for houses directly — but also, rising inflation has increased the cost of living, meaning there’s a lower number of people who can afford a home right now.