Why Are Houses So Expensive

Why are houses so expensive you ask? Good question! 

While there are many factors which go in to housing prices, there is one factor which (as it has throughout recent history), in my opinion contributes more to the price of homes than any other. In one word: Inflation!

If you listen to some in the financial sector, they would say that it is complicated, or that the market cycles are to blame. While the market cycles are definitely heading out of charted territory, there are many that assert that inflation is the root cause of many of the financial troubles we are experiencing.

Is that the case for the housing market as well? Inflation? Is that why houses are so expensive?

Keep reading and judge for yourself.

What is Inflation?

What is inflation? Is that really a key factor in why houses are so expensive?

Well let’s look at the definitions that are out there:

1. In the United States, the Bureau of Labor Statistics (BLS) and the Federal Reserve are recognized authorities on economic data and monetary policy. The BLS defines inflation as "the rise in the general level of prices of goods and services in an economy over a period of time.”
2. In Canada, Statistics Canada is the official source for economic and statistical data. They define inflation as "the rate at which the general level of prices for goods and services is rising and subsequently, purchasing power is falling.”
3. While ChatGPT gives me this answer: “Inflation is the sustained increase in the general price level of goods and services within an economy over a period of time. It signifies a decrease in the purchasing power of a currency, which results in the need for more money to buy the same quantity of goods and services.”

One major factor causing inflation occurs, in layman’s terms,  when currency is printed in to existence (by a Central Bank) which ends up devaluing the currency already in circulation. Not the only cause for sure, however a large component it can be argued of today's inflation.

It is more that the currency loses it purchasing power so it takes more of it to purchase the same goods or services. Currency is printed in to existence and introduced in to the regular economy via the financial industry.

It gives the appearance that everything gets more expensive. In reality, it is just that it takes more dollars now (because each dollar was devalued) to purchase the same goods and services it did last year, and way more than it did 10 years ago.

I realize this is a simplified explanation, however, it needs to be highlighted given the increase of the money supply (aka money printing) in just about every western country. We have not seen the last of this effect on goods and services.

There are many others who can explain it in more detail, which I will provide links for at the end of the article.

How Does Inflation Affect Why Are Houses So Expensive?

Here are the 3 main ways inflation affects home prices:

1. Reduced Purchasing Power: Inflation erodes the purchasing power of the currency individuals have saved or earned. As the cost of living rises, the same amount of money can buy fewer goods and services. Home buyers are particularly affected because you can’t make any more land, so it will be one of the first commodities to go up in price.
2. Impact on Mortgage Rates: Inflation can lead to higher interest rates set by central banks. This affects home buyers through higher mortgage rates. When interest rates increase, home buyers may face larger monthly payments, which can make homeownership less affordable.
3.  Appreciation of Real Estate: We are told that real estate often appreciates in value over time, which can serve as a hedge against inflation. However, as noted above, it is not really the value of the home increasing (unless improvements have been made of course), but the currency losing its purchasing power so it will take more dollars to buy the same house. It is no small wonder many municipal taxes are based on the “value” of the home.

In summary, inflation reduces the purchasing power of money, leading to higher purchase prices and can lead to higher interest rates, affecting the affordability of homes for buyers.

Are there not other factors in house pricing?

Yes, there are regular market forces at work in addition to inflation. Location, supply and demand all have an impact on how expensive a house is. Here is a summary of the main economic factors that can make housing more expensive:

There are other factors which will demand a higher price, but these are by far the most common.

Potential Solutions To An Expensive Housing Market

What can we do to find a house that is not expensive, is there even a solution? Yes there are always potential solutions, at least in my opinion. All of them involve a fair amount of effort, because when buying a home is not easy, it just means you will need to be better prepared, and put in more effort to find the deal that really works for you.

1. More Research: Can you find a home that would work for you that is located in an area further out of town? Are there criteria you are using which you can reduce or change to fit a more economic choice? (Example: look at townhomes or duplexes instead of single family) 
2. Reduce Financing: Adjust your personal finances to contribute a larger amount to savings for a larger down payment. Run calculations, or work with a mortgage broker to see what down payment amount would give you a result that would work better for you long term, on a house that meets your needs.
3. Make low offers on houses that suit your needs: I have done this myself, and it will not be an easy road! Realtors typically don’t like to do this, however, it is not illegal. Offer an amount that would work for you, and be prepared to be rejected. Eventually you may find a seller who just wants to sell at a lower price. The only way to find this out is buy making low offers and wait for the one who counters offers - then you know you might have interest in a lower price. 
4. Borrow Money From Relatives: Can you get better terms for a loan from relatives, good friends, or private lenders than you can from a bank? Some folks are only getting a low % interest, perhaps offering something in between what the banks are charging and what someone is getting on an interest bearing account might be attractive since it can be secured by the property title.
5. Get Creative: Can the home be converted to rent out part of it? Or perhaps an in-law suite to share the costs with family or friends? Can you buy a triplex from an investor with 2 other couples and split the costs 3 ways (sometimes this can be more economical). Or partner with a family member to rent out the other two units while you occupy one and manage the rentals? Or is the lot large enough to sub-divide the lot and sell off a portion to recoup costs and reduce the mortgage? Could you find a way to temporarily by the property cash outright, then just get an interest only loan one you occupy it?

As you can tell from the above there are likely no magic solutions, however, where there is a will and persistence, there might be a way! 

As the author Calvin Coolidge once said “Nothing in this world can take the place of persistence…Persistence and determination alone are omnipotent. The slogan “press on” has solved, and always will solve, the problems of the human race.”

Detailed Explanations of Inflation

Many are asking not just why houses are so expensive, but why are many things we need every day more expensive.

As I mentioned before, there are folks who are far better at explaining how the market forces work and specifically the causes of inflation. Here are some articles I found useful:

ITM Trading Blog Article - What Is Inflation?

GoldSilver.com - The Truth About Inflation and Oil Prices

EconomicsHelp.org Blog Article - The Link Between Money Supply and Inflation

Home > Current Real Estate Market News > Is Housing Market Slowing Down (This Page)