In this article, we’ll take you through some important factors because of which Real Estate investments are considered as a hedge against inflation. And how you can protect your wealth in uncertain times by investing in Real Estate.
The past couple of years have been absolutely crazy in terms of surging markets leading to a buying frenzy for everything – from stocks and cryptocurrency to new homes. With inflation at a nearly 4-decade high at present, and the emergence of rate hikes by the US Federal Reserve, the lookout for investing safely in reliable instruments is on.
Hedge against Inflation
Real estate is considered by many as a great option to hedge against inflation, given that it usually has little correlation with equity markets and bonds. As a result, it is a buyer’s market for real estate investors.
Despite a slightly overpriced and competitive market, some experts claim that buying real estate now is a good bet, given that rate of interest on home loans are still low. While some experts would like to believe otherwise. This is because real estate industry is highly localised and not all areas offer the best of deals. Metro cities might offer more prospects as compared to smaller cities. However, it boils down to an individual’s outlook of the situation and time at which they wish to invest.
Are inflation and real estate correlated?
Inflation and real estate don’t really seem to be correlated at first glance. Inflation, as you know, is based on consumer prices, while the real estate industry is based on demographic trends, overall demand and supply, and urbanization.
However, if you consider a longer time horizon, inflation and real estate tend to move in the same direction. This is due to the combined effect of wages and interest rates. When inflation goes up, so do the wages, which in turn increases an individual’s budgets for renting and purchase power for buying. When the cost of borrowing is cheap, the demand for property increases. Inflation is prevalent in such low interest rate atmosphere.
Benefits of real estate
Real estate is considered as a reliable hedge against inflation for a number of reasons. Firstly, you can witness a direct effect of inflation on debt. As the price of a property increases over time, it lowers the net effective value of any loan. This is a natural discount that you are being offered over time without even working for it. Consequently, your home equity increases, but your fixed-rate loan payments stay the same.
Not only does inflation benefits home buyers, but also real estate investors who are earning income from their rental properties. When prices of property increase, so does the cost of renting. Given the short-term lease structures followed across most residential properties, it is certainly more favourable as compared to commercial lease. Now think of it this way – If the rent goes up by a certain percentage every year while your home loan remains the same, the appreciation in real estate will end up putting more money in your pocket.
Lastly, real estate can be a good hedge against inflation because property value trend chart is always a steady upward curve. When the real estate bubble burst in 2008, the property values were back to their prices, before the crash, in less than a decade. Real estate investments are a great tool of recurring income for investors and can potentially help them keep pace with inflation in terms of appreciation. If the times are good, you might even leave inflation behind.
What should you do?
One can use real estate to hedge against inflation by investing in residential properties. Commercial properties like retail shops, offices and restaurants usually have a multi-year business lease whereas individual rental units usually renew property leases every year. This provides you with ample opportunities to adjust the rent and extract more value out of your investment.
Appreciation in commercial properties is relatively lesser as compared to residential properties. It means that it takes longer to adjust to inflation. Also, due to the prominence of remote working, commercial properties are less in demand.
As a result, investing in residential properties makes more economical sense. But again, it all depends on the localities and trends in your city. So, the final call shall be yours, considering how situations contour to your needs.
A Head Start
Check out some of the residential projects under the banner of Address India.