What Happens to House Prices During Stagflation?

During periods of stagflation, house prices tend to stagnate or fall in real terms, even if nominal prices appear stable. Stagflation combines high inflation with weak economic growth (or even recession), which creates a hostile environment for the housing market. Mortgage rates rise with inflation, while household incomes fail to keep pace, reducing affordability and suppressing demand for real estate during stagflation.

Historically, housing markets perform poorly during stagflationary periods because the usual supports for house prices break down. Inflation pushes up borrowing costs, economic stagnation weakens employment and wage growth, and tighter financial conditions limit access to credit.

As a result, real estate prices during stagflation often fail to keep up with inflation, leading to declining real house prices even when nominal values do not collapse outright.

This article explains what happens to house prices during stagflation, how the housing market behaves under these conditions, and why real estate tends to underperform compared to inflation hedges such as commodities.

It also looks at historical evidence from the 1970s stagflation period and the role mortgage rates play in shaping housing outcomes.

Understanding Real Estate During Stagflation

During stagflation, house prices are under pressure from both sides of the market. High inflation pushes interest rates higher, increasing mortgage costs and reducing affordability for buyers. At the same time, weak economic growth limits income growth and job security, which further suppresses housing demand.

In many cases, nominal house prices may appear resilient, but once adjusted for inflation, real house prices tend to stagnate or decline. This makes housing a poor inflation hedge during stagflationary periods, particularly compared to assets that benefit directly from rising prices.

Interest Rates, Mortgage Costs, and House Prices During Stagflation

Interest rates play a central role in determining house prices during stagflation. As inflation rises, central banks like the U.S. Federal Reserve are forced to pursue a tight monetary policy by keeping interest rates higher than they would during a normal economic slowdown. Higher mortgage rates directly reduce housing affordability and lower stagflation house prices by increasing monthly payments, pricing many buyers out of the market even if nominal house prices remain unchanged.

During stagflationary periods, this effect is particularly damaging because household incomes are not rising fast enough to offset higher borrowing costs. The result is weaker demand for housing, lower transaction volumes, and downward pressure on real house prices.

The effects of higher interest rates are felt more in some markets than others, because interest rates represent the cost of borrowing money. Mortgage costs are directly affected by interest rates, and so stagflation usually leads to strong downward pressure on house prices. At the same time, higher unemployment rates can result in decreased demand for housing as individuals start to delay homeownership due to financial insecurity.

Remember that, during stagflation, most prices are rising. That being the case, the downward pressure of house prices might not result in falling nominal prices. It might just lead to relatively slower price rises. Real prices i.e., inflation adjusted prices, might be lower even if nominal prices rise somewhat.

Housing and Real Estate Performance During 1970s Stagflation

The stagflation of the 1970s provides a clear historical example of how housing markets behave during inflationary stagnation. While nominal house prices did rise in some periods, mortgage rates increased sharply, reaching extremely high levels by the late 1970s and early 1980s. When adjusted for inflation and financing costs, real house prices performed poorly over much of the decade.

High interest rates, weak productivity growth, and declining real wages limited housing demand, demonstrating why real estate struggled to act as an effective inflation hedge during stagflation.

The housing market in the United States was not immune to these effects. House prices stagnated and, in some areas, experienced significant declines. The combination of high inflation and high interest rates made it challenging for individuals to afford housing, leading to decreased demand and downward pressure on house prices.

In the graph above, US real house price inflation (adjusted for general long-term house price inflation) turned negative in the mid-1970s and late-1970s as the oil crisis (along with other negative cyclical forces) took its toll on the economy and created stagflation.

Of course, it is still possible for FOMO to dominate interest rate rises and declining purchasing power. Much depends on the state of the housing market as it enters a period of stagflation. If it is undervalued going in, it may still be affordable enough that FOMO dominates, allowing house prices to quickly rise.

Key Factors Influencing House Prices During Stagflation

The following main factors influence house prices during stagflation:

Inflation – The inflation rate plays a crucial role in determining the purchasing power of individuals and their ability to afford housing. High inflation can erode the value of money, making housing less affordable and putting downward pressure on house prices.
Interest Rates – During stagflation, central banks may respond to high inflation by raising interest rates. Higher interest rates can make borrowing more expensive, reducing the affordability of housing and potentially decreasing demand, leading to lower house prices.
Unemployment – High unemployment can impact the housing market by reducing demand for housing. Individuals who are unemployed or have uncertain job prospects may delay homeownership, leading to decreased demand and a potential decline in house prices.
Supply & Demand – If the supply of housing exceeds demand, prices may decline. Conversely, if demand outpaces supply due to FOMO, house prices may rise.
Government Policies – Government programs that incentivize homeownership, or provide mortgage assistance, can help support house prices.
Investor Sentiment – If investors perceive the housing market to be at risk due to stagflation, they may reduce their investments, potentially exerting downward pressure on prices. If they perceive that FOMO is dominant, they may increase their investments and stimulate price rises.

Case studies:

Examining case studies of how different countries have dealt with stagflation and its effect on house prices can provide valuable insights into potential strategies and outcomes.

During the stagflation of the 1970s, the United States implemented various measures to combat high inflation and stimulate economic growth. The Federal Reserve raised interest rates to curb inflation, which had a dampening effect on the housing market. However, the introduction of government programs such as the Community Reinvestment Act helped support housing affordability and stabilize house prices in certain areas.
The United Kingdom experienced severe stagflation in the 1970s and early 1980s. The government implemented policies aimed at reducing inflation and stimulating economic growth. These measures, combined with tight monetary policy, led to a decline in house prices. However, government interventions such as the introduction of right-to-buy schemes supported homeownership and helped stabilize the housing market in the long run.
Japan experienced a prolonged period of stagflation in the 1990s, commonly referred to as the "Lost Decade." High inflation, stagnant economic growth, and a burst property bubble had a significant impact on house prices. The government implemented various measures to address these challenges, including monetary easing and fiscal stimulus. However, it took several years for the housing market to recover, highlighting the long-term effects of stagflation on house prices.

These case studies demonstrate the diverse approaches taken by different countries to address stagflation and its impact on house prices. It is essential to consider the unique economic and policy dynamics of each country when assessing potential strategies and outcomes.

FAQs: How Stagflation Affects Housing

Do house prices always fall during stagflation?

No. House prices do not always fall outright during stagflation, but they often stagnate or decline in real terms. In some cases, nominal prices remain flat or rise slightly, but inflation erodes their real value. The key outcome is typically a loss of purchasing power rather than a dramatic nominal price crash.

Why is housing less responsive to inflation during stagflation?

Housing is less responsive to inflation during stagflation because higher inflation is accompanied by weak income growth and rising interest rates. Unlike goods and services that can reprice quickly, housing depends heavily on credit conditions and affordability, both of which deteriorate during stagflationary periods.

How does stagflation affect first-time home buyers?

Stagflation is particularly damaging for first-time buyers. Rising mortgage rates increase monthly payments, while inflation raises living costs, making it harder to save for deposits. At the same time, weak wage growth reduces borrowing capacity, effectively locking many potential buyers out of the housing market.

Are rental markets affected differently than house prices during stagflation?

Yes. Rental markets can behave differently from house prices during stagflation. While higher living costs may increase demand for rental housing, tenants’ ability to absorb rent increases is constrained by weak income growth. This often limits landlords’ pricing power, especially in markets with lower-income renters.

Does stagflation increase the risk of housing market stagnation?

Stagflation significantly increases the risk of prolonged housing market stagnation. Reduced transaction volumes, tighter credit conditions, and cautious buyer sentiment can persist for years, resulting in flat or slowly declining real house prices rather than a rapid correction.

Conclusion: What Happens to House Prices During Stagflation?

Stagflation, characterized by stagnant economic growth, high inflation, and high unemployment, can have a profound influence on the housing market. Understanding the relationship between stagflation and house prices, historical examples, and the factors influencing house prices during stagflation are critical in any particular set of circumstances.

As a general rule, as evidenced by past examples, stagflation will have a negative impact on house prices. Cases where house prices rose faster than other prices in the economy are tough to find during these periods, but each case needs to be examined on its own merits.

Sources:

OECD – US House Prices

Related Pages:

About the Author
Steve Bain is an economics writer and analyst with a BSc in Economics and experience in regional economic development for UK local government agencies. He explains economic theory and policy through clear, accessible writing informed by both academic training and real-world work.
Read Steve’s full bio

What Happens to House Prices During Stagflation?

Understanding Real Estate During Stagflation

Interest Rates, Mortgage Costs, and House Prices During Stagflation

Housing and Real Estate Performance During 1970s Stagflation

Key Factors Influencing House Prices During Stagflation

Case studies:

FAQs: How Stagflation Affects Housing

Conclusion: What Happens to House Prices During Stagflation?

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