🏡 The correlation between property prices and inflation

Rising property prices are often highlighted as an indicator of a healthy market. But can we really call it an increase if inflation is eroding households’ purchasing power? Why should property price trends always be analysed alongside inflation? Let’s take a closer look.

📊 The illusion of rising prices?

When it is announced that house prices have risen by +15% over five years, this may seem like good news for homeowners. But if, over the same period, the cost of living has risen by +20%, then the real value of properties has actually fallen.

This is known as adjusting prices for inflation. It allows us to distinguish between:
✅ Price trends in absolute terms (the market price of a property).
✅ Price trends in real terms (adjusted for inflation, which measures the loss of purchasing power).

A practical example:

• In 2019, a house sold for 400 000 EUR.
• In 2024, its price rose to 460 000 EUR (+15%).
• But if inflation over this period was 20%, then today’s 460 000 EUR is actually worth less than 400 000 EUR was in 2019.

In other words, even though the price has risen in numerical terms, the homeowner has actually lost purchasing power if they sell and reinvest in a similar property.

📈 Why does inflation have a direct impact on property?

Inflation reflects the general rise in prices: food, energy, construction materials… and, of course, property. It affects the market in several ways:

1️⃣ Rising construction costs
Materials such as concrete, timber and steel become more expensive, driving up the cost of new builds and restricting the housing supply.

2️⃣ Higher interest rates
Banks adjust their rates to offset inflation, making mortgages more expensive and reducing households’ purchasing power.

3️⃣ Declining value of money
A sum of money today cannot buy as much as it could five years ago. For a homeowner, selling at a higher price does not necessarily mean becoming wealthier if other prices have also risen.

4️⃣ Pressure on rents
With high inflation, rents also rise, which may encourage more people to buy a property rather than remain tenants… but only if their budget allows!

You now have all the information you need to fully understand the link between property prices and inflation. A rise in prices may be misleading if inflation is also high, as it reduces the real value of properties.