The US economy is starting to recover from the pandemic, but the recovery process has stressed supply chains and caused inflation to rise abruptly. Inflation swells and dips with the fluctuations in supply and demand, production costs, and other factors like war, and the surge in fuel prices. Globally, the situation is tentative and future unpredictable.
That being said, there are several assets that could offset the impact of inflation, including some types of bonds, gold, and other commodities. All of those are safe havens,, and we may be biased, but the most important may be real estate. In this article we will answer the question: why is real estate a hedge against inflation?
Causes Of Inflation
Several global factors, the Russian war with Ukraine, the pandemic, and the possible recurrence of shutdowns in China, will impact US economic development. It is a cycle and the longer it lasts, the more wages and price of goods will be affected. The government policy could get more challenging by increasing the interest rates and keeping them high, which could affect:
economic growth
employment
purchasing power
Why Is Real Estate a Hedge Against Inflation?
Real estate is one of the safest investment options during uncertain economic times. Not even high inflation can even put pressure on its value. Therefore, it is still considered the safest bet compared to other investment options.
Additionally, unlike other long term investment options, you can influence the return of your investment rather than a bank deciding for you. And finally, housing market returns outperform the returns received from other asset classes.
Inflationary periods usually run parallel with higher mortgage rates, increased cost of materials, and the rising cost of borrowing. While these might slow down the growth, they cannot stop it.
Inflation benefits real estate investors who earn rental income from their properties, specifically property segments with short-term lease constructions like multi-family properties. This is due to higher home prices resulting in higher rent. The more units a building has, the more opportunity you have to adjust the rent. Increasing the rent while keeping your mortgage the same will provide you with options to save more.
Besides the above, apartment complexes are a unique asset class. They are always in demand, especially when housing prices rise. And when there is an increase in labor and material costs, builders put new constructions on hold, causing demand for existing apartments.
These factors will increase the rental rates and property values. Your apartment or any other property will not be vacant for long. Despite becoming more expensive people still need a place to live so demand is high.
Another point to consider is that expense repayments, another lease factor, is another way real estate keeps pace with inflation. When you sign a lease, you pass some of the property’s operating expenses on to your tenants, whatever type of building it is. The tenants bear any increase in the maintenance costs, and it does not affect your income.
Many people ask what the right time to invest in real estate is. Do it right now. Property value keeps appreciating, and it will offset the effects of inflation for you.
How inflation affects real estate?
Like we mentioned earlier Inflation results in mortgage rates rising, higher cost of goods and services, and an increased cost of capital. This will often slow down real estate inventory growth. New construction projects are not the best to take on during periods of inflation. The demand for rental units increases which is where you want to focus your efforts.
Studies show that real estate returns can easily hold steady during inflation. As an investor, if you are selling your property, you will most likely benefit from inflation.
In short, real estate provides an excellent hedge against inflation, and investors agree real estate as an asset class can offer better benefits than other investments during inflation.
Conclusion
Inflation is a recurring factor in the economy and a risk for every investor should consider. The level of inflation in an economy changes depending on the current circumstances in the country. However if you are a savvy real estate investor you understand that real estate is a great hedge against inflation.
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