Is Real Estate An Inflation Hedge?

Stocks, cryptocurrencies, and new homes have all been on the rise over the past two years due to a soaring market. In the current economic climate, with inflation at a nearly 40-year high and at least three rate hikes assumed to occur within this year, investors are in search of safe havens to invest in. 

Since real estate generally has little correlation with other asset classes, such as stocks and bonds, it is considered one of the best ways to hedge against inflation. Residential real estate has seen a rise in interest in recent years. Even though the market is booming, there is a shortage of homes available, and mortgage rates threaten to climb despite the extremely hot market.

Considering inflation-hedged investments could be a good option if you are concerned that inflation may harm your retirement savings. Investing in real estate has the potential to work for you as inflation differs from investing in stocks, bonds, and mutual funds, as it is likely to increase your income as inflation increases.

As a proven wealth-building tool, real estate investing can be an excellent method to help you build wealth, but most busy professionals do not have the time to manage tenants, toilets, and trash on their own.

Correlation Between Real Estate and Inflation

​​Housing is based on demographic trends, construction, and overall supply, whereas inflation is based on consumer prices, which are determined by consumer prices. However, both inflation and housing tend to follow the same trend over the long run because of the effect of wage increases and interest rates on wages and prices.

Often, inflation raises wages, leading to a rise in budgets for renting and buying homes, which in turn can push wages up more. A low-interest rate environment also often leads to inflation, such as in the U.S. and some parts of Europe, where borrowing costs are low, and there are low-interest rates. Because of this, there has been an increase in the demand for property as well.

Real Estate’s History of Performing Well

Real estate has been well documented as being able to provide some protection against inflation – at least to some extent. In addition, landlords will generally be able to raise rents in better economic times when the economy is in much better shape, which will, in turn, increase the value of the property. In addition, many lease agreements in the real estate industry contain contractual rent bumps that are directly linked to inflation rate increases every year.

Increasing real GDP growth is indicative of stronger demand for commercial space, which in turn leads to landlords passing on more costs to their tenants in the form of higher rents in response to favorable supply and demand market conditions.

When the real GDP growth rate of the economy was lower and when inflation was very high or very low, private real estate usually performed worse than the public sector.

Keeping rents high when leases change frequently and low vacancy rates can keep incomes up with inflation. The leases on residential investment properties renew annually, which has been a positive factor during inflationary periods. While stock prices fell in the 1970s, residential real estate increased in value.

Finally, higher inflation implies that items such as construction materials, labor, and land parcels will cost more to replace. Several factors make new development projects more expensive, which limits the number of new developments and allows the price of existing assets to grow, resulting in more room for rents to go up and values to appreciate.

How Income-Generating Properties Can Profit from Inflation

Generally speaking, rental income from investment properties does not fall behind the inflation rate and, in some cases, exceeds it. As a matter of fact, rents in some desirable cities have risen 30% in the last year due to our current inflationary environment.

The fixed-rate mortgage allows you to keep your loan payments the same throughout the loan term, which means you can have a spread (more rental income) between the rising costs of your mortgage payment and those of your rent payments.

In addition to expenses such as insurance and taxes, one must also consider that income-producing real estate usually has a higher rental income than expenses that are associated with it.

Typically, the expenses in multifamily apartment buildings are half of the income generated by the apartments as a whole. Increasing rent checks result in higher income when rising inflation impacts real estate, outpacing smaller expense bills. It has been observed that when inflation rates are high, this effect may lead to increased cash flow and profits for businesses.

Reduced Mortgage Costs

Buying your own home with a fixed-rate mortgage might be the most important step you can take in order to hedge against inflation. While renting is not inherently bad, it also presents the risk of building someone else’s equity while still subjecting yourself to the inflated annual rental increases associated with renting, a risk that may not be as advantageous as you might think.

A fixed-rate mortgage determines how much you pay each month based on how the dollar is priced at the time of purchase when you purchase a property with a fixed-interest mortgage. With inflation on the rise, the dollars you pay for your mortgage and your other loans will be cheaper over time as you make payments.

Inflation of the dollar makes it easier for you to make your mortgage payment in the future, whereas falling prices of the dollar make it harder for you to maintain your rental payments.

Protecting Yourself Against Inflation in the Long Run

You could mitigate inflation before it drains the purchasing power in your retirement accounts by making sure you consider the effects of inflation on your assets when it comes to investing for your future.

The important thing is that you can hedge your bets against inflation by investing in real estate to generate income, which will help you to protect your retirement dollars for a long time to come.

Traditionally, real estate has been a popular asset class among investors – now, you can invest in it too! With Saint Investment, you can invest in a consistent, diversified portfolio of institutional-quality real estate assets. Reach out to us today!

Frequently Asked Questions:

What is an inflation hedge?

An inflation hedge is an asset that retains its value or increases in value during periods of inflation, which is a sustained increase in the general price level of goods and services in an economy.

Is real estate considered an inflation hedge?

Real estate is often considered an inflation hedge because property values and rental rates can increase in response to inflation, but its effectiveness as an inflation hedge depends on various factors.

What factors can limit real estate’s effectiveness as an inflation hedge?

Factors that can limit real estate’s effectiveness as an inflation hedge include changes in interest rates, local economic conditions, and changes in supply and demand for housing.

Can real estate serve as a sole inflation hedge in an investment portfolio?

Real estate should not be relied on as a sole inflation hedge in an investment portfolio. Diversification is key in building an investment portfolio that can withstand economic changes.

Are there specific types of real estate that serve as better inflation hedges than others?

Real estate assets that generate cash flow, such as rental properties or commercial properties with long-term leases, can serve as better inflation hedges than vacant land or speculative real estate investments.