How Much Can Prices Keep Going Up?

​In what feels like a steady but rapidly appreciating real estate market, at least since about 2010, people on all sides are beginning to ask questions regarding the length of this cycle.  “How long can things continue to go up at this pace?” “What could cause a change in trajectory?” and “How does inflation play into all of this?”  For the purpose of this article we will focus primarily on the last of these questions by looking at values of real estate and how inflation may impact these values.
 

It would be hard to argue against the current inflationary pressures we see across many sectors of industry. The prices of goods and services are steadily increasing, and in some cases dramatically.   In the real estate world, people hear the stories of construction materials skyrocketing coupled with a scarcity of land, and it’s no wonder that real estate prices are keeping pace.  When we match the scarcity of materials and land with significant market demand to occupy key industrial real estate, and on top of that we see an introduction into the economy of billions and trillions of new dollars, the end result is that the present real estate market is experiencing the pressures of inflation.  There are too many resources chasing too few opportunities, and prices are soaring. 
 
But what is going to happen to real estate prices if we enter into a market correction period?  What would be the impact if there were significant reductions in demand from current levels? Can we expect to see 20%, 30%, 40% reduction in asset values from our current levels?  I would propose that ‘no, we won’t see that large of reductions, at least not in core markets and not on paper.’  From 2007 to 2009 in Southern California we saw industrial real estate values (asking and sale prices) decline by +/- 35% on average, which was due to a significant global economic catastrophe.  In 2020 during another significant event, the pandemic, which was possibly a more disrupting event to supply chains, we actually saw industrial (and residential) real estate values increase.   Key factors were the continual evolution of the E-Commerce sector driving demand for industrial space and the abundance of money pumped into the system.
 
As we look at these factors in the assessment of current values and the prediction of future values, when accounting for inflation, we must drill down on the money supply component.  Our government has pumped trillions of dollars into our economy, and the result is the dollar losing value.  Therefore, can we then have a scenario where ‘real values’ are actually decreasing but ‘nominal values’ (or value on paper) is increasing at the same time?  Could the inflationary pressure on price be so high that while the real value for goods and services is actually decreasing rapidly, the nominal price for those goods and services is at the same time going up rapidly?  I believe the answer to this is ‘yes,’ and we therefore need to keep that in mind when evaluating our decisions. 
 
Talk to a real estate agent today about the decisions you are considering and how to match the current market dynamics, trends and opportunities with your overall strategy to grow and protect wealth.  Owning real estate has always been a good place to protect your wealth from inflationary pressures, and so is a little debt.