hyperinflation and prices of real estate

[cbc58]

I am trying to determine what will happen to the prices of real estate when hyperinflation kicks in.

Will home prices rise in relation to the value of the dollar ?

My sense is that once interest rates start to rise, the other shoe (a big one) will drop and property values will decline (except maybe for farmland). It's after that which I am asking about. When they start to print massive amounts of money... will home prices (not values) go up in relation to dollar value?.. or will real estate take an even further hit as people scale down and move into smaller homes accross the country?

Anyone from another country that has experienced this reading the board?

[Bern]

In Argentina in 2000 or so when the currency/economy collapsed and hyperinflation was rampant, real estate markets collapsed. Land was (and still is) relatively cheap.

[cbc58]

So values kept going down and stayed down. That I understand.

In simplistic terms what I am trying to understand is this: If there is a currency crises in the US, and a home is valued today at 100k, and that value remains the same throughtout the crisis but the dollar is devalued 4-1, will it take 400k to buy the same house?

The value hasn't gone up just the # of dollars it's worth. Is that a correct thinking?

If so, prices can rise even though values may fall if it is an asset not in demand.

[Bern]

No way to predict, but in Argentina, the prices actually fell (of course, their currency was also re-(de)-valued at some point).

[mojobo]

A lot of the things that require credit to buy will likely decrease in price. Most of the credit is going to go to government to keep their programs solvent, which will mean less credit going towards private industries.

[cbc58]

A lot of the things that require credit to buy will likely decrease in price. Most of the credit is going to go to government to keep their programs solvent, which will mean less credit going towards private industries.

I'm not sure I understand what you mean. Are you saying there will be less money available on an overall basis and much will go to govt.? Would that mean that those who have money (or can get loans) can pretty much dictate what they want to pay - i.e. supply/demand?

[Bern]

When credit is harder for consumers to access, demand for things that normally require credit to buy - real estate, cars, boats, etc. - will fall. As demand falls, prices fall. It's another reason that Bernanke is trying so hard to keep down interest rates right now - to prop up asset (ie. real estate) prices.

[cbc58]

I understand supply/demand economics, and know that when rates start to rise that will drag down prices. Got that.

So let's say rates go to 20%, and a house is valued at 100k then, and the govt wants to keep rates at 20% so it keeps printing more and more money until the dollar is devalued 4-1. Now it takes 4 dollars to buy what one dollar bought.

Will that house now cost 400k? .. or will the fact that most people will no longer have that purchasing power keep the price at 100k? This is what I'm having a hard time with. The cost of lumber, materials and labor will escalate, so I can't see how prices could remain at 100k.

[Jordan]

Real estate has generally tended to track inflation for the reasons you mention, lumber, tools, labor, etc, but it's hard to know what will happen if inflation is 20% instead of 2-3% annually. There's no sense to build more homes when they sell for less than their cost of replacement.

I would suspect that home valuations would rise, but probably at a much greater time lag than other assets due mostly to the fact the market isn't all that liquid. But WTF do I know, this is pretty much uncharted territory.

[cbc58]

I got this off a gold website which had a description of what happened during the weimar republic hyperinflationary period:

Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. However, they received no income, as noted above, since rents were frozen. After the stabilization, heavy new taxes and the urgent need for cash forced most holders to remortgage their property, often more heavily than originally, so that their gains were illusory. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation.

According to this, real estate wasn't desireable as an investement and prices remained low. So it looks like there is a confluence of forces at play and real estate will actually decrease even more in value unless it has usefulness. I guess anyone sitting on a rental property thinking they can just jack up rents as the dollar devalues should think again...

I'd love to hear more thoughts on this because it is important to just about everyone I know.