Sometimes, though, the Fed loses control of inflationary price increases (late 1940s, the entire 1970s, early to mid 1980s). During those superheated, inflationary times, real estate prices will often experience inflationary gains of 6 to 12 percent a year. Buy now and then cheer for inflation.
1960s all the way up to 13 percent in 1982. And for the record, you might note that during those 16 years of increasing inflation and skyrocketing interest rates (from 1970's 6.0 percent to 1981's 16 percent), most property values nearly tripled.
Although higher inflation drives up interest rates, inflation also drives up rent levels and construction costs. Even better for investors who own real estate, when inflation heats up, the smart money flees financial assets (stocks and bonds) in favor of hard assets (real estate, gold, collectibles). As a result, property prices are pushed even higher as stock and bond prices stagnate or decline.
For example, in 1964, the stock market's Dow Jones Industrial Average peaked at close to 1,000. In 1981, it sat at less than 800-20 percent below its high mark of 17 years earlier. During this same 17-year period of higher interest rates and inflation, the nationwide median house price zoomed from $25,000 to nearly $75,000.
History proves that over lengthy periods, higher interest rates do not hurt property values. Quite the contrary, higher interest rates (which merely reflect high inflation) propel property prices to new record heights.
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