The Impact of Inflation on Rental Prices in Ghana
- Research Objectives
The main objective of the study is to examine the Impact of Inflation on Rental Prices in Ghana, the specific objectives are:
- To evaluate the affordability challenges faced by tenants in the context of inflation.
- To investigate the decision-making process of landlords regarding rental price adjustments in response to inflation.
- To examine the implications of inflation on investment decisions in the rental property sector in Ghana.
Concept of Inflation
According to Keynesian economics, inflation can be understood as demand-pull inflation. This conceptualization suggests that inflation occurs when aggregate demand in an economy exceeds its aggregate supply, leading to an increase in overall price levels. It emphasizes the role of excessive demand and consumer spending as the driving force behind inflation. (Keynes, 1936). Another conceptualization of inflation is cost-push inflation, which focuses on the supply side of the economy. According to this view, inflation occurs when the cost of production increases, such as through rising wages or input prices, leading to higher prices for goods and services. Cost-push inflation can be influenced by factors such as labor market dynamics, changes in raw material prices, or supply disruptions. (Phelps, 1967)
Also, monetarist economists, such as Milton Friedman, emphasize the role of money supply in determining inflation. They argue that inflation is primarily a monetary phenomenon and that an increase in the money supply beyond the growth rate of real output leads to inflation. This perspective highlights the importance of central bank policies, such as monetary expansion or contraction, in controlling inflation. (Friedman, 1968). Rational expectations theory, developed by economists such as Robert Lucas, posits that inflation is influenced by people’s expectations about future price levels. According to this view, individuals base their economic decisions, including wage negotiations and price-setting behavior, on their expectations of future inflation. It suggests that inflationary expectations can be self-fulfilling, with people adjusting their behavior in response to anticipated inflation. (Lucas, 1972). The Phillips curve, introduced by economist A.W. Phillips, depicts the relationship between inflation and unemployment. According to the Phillips curve, there is an inverse relationship between the two variables, suggesting that when unemployment is low, inflation tends to be high, and vice versa. This conceptualization implies that inflation can be influenced by labor market conditions and the trade-off between inflation and unemployment. (Phillips, 1958)
A rise in Inflation raises inflation volatility
There is a popular proposition that future inflation uncertainty is raised by a rise in inflation. In the early 1970s, Okun (1971) articulates this proposition. Since Friedman‟s (1977) Nobel Memorial Lecture of December 1976, entitled Inflation and Unemployment, it has grown reputation. He suggested that rising inflation, lead to raise unemployment, generates burden to lower inflation and raises private agents of uncertainty about future inflation and monetary policy by means of a critique of the highly influential idea of relationship between inflation and unemployment derived from Philip-curve. Inflation uncertainty attempt to reduce economic activity and the level of investment and could be a fundamental cause of business cycles (Engle, 2004).
The justification behind this suggestion is that inflation uncertainty reduces the price system efficiency in harmonizing economic activity in the market economy. Friedman (1977:467) indicated this as follow: the more uncertainty inflation, „the harder it develops [for economic agents] to abstract the single about relative prices from the absolute prices‟. The lower the level of rate of growth and rate of growth lead to raise the rate of unemployment. Later, Ball (1992) formalizes the relationship between inflation and inflation uncertainty in an investigative paper. Friedman (1994) expanded the further idea and suggested that when inflation raises and becomes volatile the link between unemployment and the rates of inflation is likely to be positive rather than negative. When inflation in an economic system is deeply embedded, it is costly and difficult to lower inflation because inflationary expectations come to be inertial and cannot be lowered quickly and easily to get inflation down to a sustainably low level.
In contradiction of Friedman proposition that inflation uncertainty is raised by rising inflation, other suggestion is that rising inflation may lower uncertainty of inflation. Pourgerami and Maskus (1987) recommend that agents can invest increased resources in an effort to improve foresting inflation when the inflation is to accelerate and this can be lower inflation uncertainty. A formal analysis of the phenomenon has been developed by Ungar and Ziberfarb (1993).
Inflation volatility raises the rate of inflation
To demonstrate the response of inflation uncertainty impact on the rate of inflation, Cukierman and Melzer (1986) have applied the model of Barro-Gordon, which is central bank behavior. On average, higher uncertainty about future inflation or money growth is advised to raise the inflation rate. Furthermore, an unstable political environment, wherein contractionary employment-anxiety is heightened, makes scope for the monetary authorities to create inflation surprises with the purpose to raise employment and economic activity. The mechanism could be politically attractive although the fact that the positive influence of inflation surprises on employment is short-lived. If under the strict policy rule the monetary authorities do not operate, they may accept an expansionary monetary policy to convince the wishes of political leaders who retain final control over central banks in all cases. Therefore, a meaningfully positively impact on the rate of inflation is interpreted as sign of an „opportunistic central bank‟
A comparative view to the Cukierman-Meltzar thesis has been developed by Holland (1995). He discusses that a stabilization central bank may attempt to alleviate or avoid the welfare losses ensuring from higher inflation by narrowing the growth rate of money because of inflation volatility inflation volatility increases with rising inflation. A central bank may lower the rate of growth of money supply, rather than it in this case as Cukierman and Meltzer discuss. Consequently, inflation uncertainty can reduce the rate of inflation rather than raises. Then an important negative influence of inflation uncertainty is understood as indication of a „stabilization central bank‟.
This chapter introduced the description of the adopted research methodology which was applied during the study. It unravels the research design, population of the study, sample population, research instruments, instrument validity, and instrument reliability.
A research design is a basic plan that guides the data collection and analysis phases of the research. (Kinnear & Taylor, 1996; Churchill & Iacobucci 2005) define research design as the blueprint that is followed to complete the study and it ensures that the study is relevant to the problem and will use economical procedure. Thus, the research design for this study is Survey Research design. Survey research is defined as the collection of information from a sample of individuals through their responses to questions. (Check & Schutt, 2012, p 160). The survey type of research allows for a variety of methods to recruit participants, collect data and utilize various methods of instrumentation.
Population of Study
The entire number of units from whom evaluation representatives are drawn is referred to as the population (Parahoo, 2014). As defined by Saunders et al. (2012), a population is the total number of cases from which a sample is selected. Using Ghana as a case study, this research aimed to determine the Impact of Inflation on Rental Prices in Ghana.
DATA PRESENTATION AND ANALYSIS
This chapter is targeted at analyzing the data collected adopting a simple percentage and frequency presentation. The presentation is done in a tabular form for clarity and easy understanding. To get the research data, 145 questionnaires were distributed.
SUMMARY, CONCLUSION AND RECOMMENDATIONS
The study aimed to investigate the relationship between inflation and rental prices in Ghana, providing valuable insights into the dynamics of the housing market and assisting stakeholders in making informed decisions. The study employed a mixed-methods research approach, combining quantitative analysis of historical data and qualitative methods such as interviews and surveys. The research objectives focused on evaluating the affordability challenges faced by tenants in the context of inflation and examining the implications of inflation on investment decisions in the rental property sector. The findings from the questionnaire responses shed light on these objectives. Regarding affordability challenges faced by tenants, the data revealed that a significant majority of respondents found it difficult to afford rental payments due to the impact of inflation. The rising cost of living caused by inflation also affected their ability to meet other essential expenses after paying rent. Furthermore, rental prices were reported to have increased significantly in recent years due to inflation. Regarding investment decisions in the rental property sector, the findings indicated that fluctuations in inflation rates significantly impacted the profitability of rental property investments. Inflation was found to influence the decision-making process of investors and was recognized as a factor to consider when projecting rental income and potential returns. Higher inflation rates were perceived to lead to increased uncertainty and risks for investment decisions. The significance of the study lies in its contribution to the understanding of the impact of inflation on rental prices and investment decisions in Ghana. The findings provide insights for policymakers, landlords, tenants, and investors to address affordability challenges, make informed investment choices, and design appropriate policies to mitigate the adverse effects of inflation.
The study explored the relationship between inflation and rental prices in the Ghanaian housing market. Through a mixed-methods research approach, combining quantitative analysis and qualitative methods, the study provided valuable insights into the dynamics and implications of inflation on rental prices and investment decisions. The findings of the study highlighted the significant impact of inflation on both tenants and investors in the rental property sector. From the perspective of tenants, the study revealed that inflation has led to affordability challenges, making it difficult for tenants to afford their rental payments and meet other essential expenses. This emphasizes the need for policymakers and stakeholders to address these challenges and ensure housing affordability for individuals in Ghana.
From an investment standpoint, the study demonstrated that fluctuations in inflation rates significantly influence the profitability of rental property investments. It was observed that inflation plays a crucial role in the decision-making process of investors, who need to consider inflation rates when projecting rental income and assessing potential returns. Additionally, higher inflation rates were found to introduce uncertainties and risks for investment decisions, highlighting the importance of risk management and strategic planning for investors in the rental property sector.
Based on the findings of the study, the following recommendations are suggested for policymakers, landlords, tenants, and investors:
Implement targeted affordability measures: Policymakers should consider implementing measures to address the affordability challenges faced by tenants in the context of inflation. This could include the development of affordable housing initiatives, rent control policies, and subsidies to support low-income households. By ensuring housing affordability, policymakers can alleviate the financial burden on tenants and promote stability in the rental market.
Monitor and regulate rental price increases: Given the significant impact of inflation on rental prices, it is important for policymakers to monitor and regulate rental price increases. Implementing policies that restrict excessive rent hikes can help mitigate the negative effects of inflation on tenants’ ability to afford their housing. This could involve setting limits on rent increases, establishing rental price indexation mechanisms, and promoting transparency in rental agreements.
Provide financial literacy and support programs: To assist tenants in managing their finances effectively, stakeholders should consider providing financial literacy programs and support. These initiatives can educate tenants on budgeting, saving, and financial planning, helping them navigate the challenges posed by inflation and maintain their rental payments while meeting other essential expenses.
Develop inflation hedging strategies for investors: In light of the findings regarding the impact of inflation on investment decisions, investors in the rental property sector should develop inflation hedging strategies. This could involve diversifying investment portfolios, considering long-term leases with rent escalation clauses tied to inflation indices, and staying informed about economic indicators to make informed decisions.
Enhance data collection and analysis: To better understand the relationship between inflation and rental prices, stakeholders should invest in comprehensive data collection and analysis. This includes regular monitoring of rental prices, inflation rates, and other relevant economic indicators. Improved data can facilitate evidence-based decision-making, enable accurate forecasting, and enhance the effectiveness of policies aimed at addressing inflation-related challenges.
Foster collaboration and dialogue: Stakeholders, including policymakers, landlords, tenants, and investors, should engage in collaborative efforts and dialogue to address the implications of inflation on the rental property sector. This can involve regular consultations, workshops, and forums where experiences, concerns, and best practices can be shared. Collaboration can lead to innovative solutions, improved policy design, and a better understanding of the needs and perspectives of all stakeholders.
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