As we covered previously, rampant inflation can often drive cost overruns on custom home builds. During periods of inflation, hesitation in engaging in new builds is understandable. However, there are a multitude of options that, through the use of a contractor, you can avoid cost overruns and offset increased prices from inflation.
This time, we will look at new builds in relation to inflation from a monetary policy standpoint. While traditional theorists have, at times, suggested that construction in a period of high inflation can work to the detriment of the economy, most results indicate that new builds are both a safe hedge against inflation and critical to economic productivity.
In relation to the economy, new builds are critical for maintaining productivity. The continued production of new builds, regardless of unanticipated inflation, often reduced inflation’s felt effect (Jarrett & Selody, 1982). One study, conducted over 16 years, found that reduced production of new builds, often due to anticipated inflation, had a spiraling effect of increasing inflation (Jarrett & Selody, 1982).
With that said, new home builds are worthwhile to pursue in terms of market health, but what about when it comes to an increased burden on the consumer? Another study found that housing value often matched inflation when scaled to account for erroneous added or detracted value. Simply put, home values did not rapidly increase or decrease outside of a natural threshold, even as inflation grew (Aruoba et al, 2014).
These results mean that housing is used similarly to other forms of capital to hedge against volatile inflation. This hedging can be accomplished because builds and homes do not have significant value deviation in the long run, concerning inflation at least.
For builders or those looking to build, inflation should not be a hold-up in pursuing a project. Either the build will contribute to increased inflation stability or can be used to hedge against inflation. If you are ready to build your dream home, call today.
Aruoba, S. B., Davis, M. A., & Wright, R. (2014, November 25). Homework in monetary economics: Inflation, home production, and the production of homes. Review of Economic Dynamics. Retrieved June 9, 2022, from https://www.sciencedirect.com/science/article/pii/S1094202514000581
Jarrett, J. P., & Selody, J. G. (1982). The Productivity-Inflation Nexus in Canada, 1963-1979. The Review of Economics and Statistics, 64(3), 361–367. https://doi.org/10.2307/1925933