Over the last two decades, rising markets fueled a buying spree for everything from equities and virtual currencies to housing units. With inflation nearing a 40-year high and at least three rate increases, investors are looking for safe places.
Because real estate has little connection with equities and bonds, it is regarded as one method of hedging against inflation. As a result, investor confidence is skyrocketing. A perfect example is the hot Canadian real estate market, wherein the short supply of homes, bidding wars amongst buyers, and housing crisis are the talk of the town.
Even with a hot and competitive industry, some experts believe that real estate investment now is a good bet because mortgage interest rates are still cheap. Others argue that because the housing market is so localized, it is case-by-case, and remote regions may not offer the same opportunities as large cities. But, in the end, it comes down to a person’s situation and asset time horizon.
Is there a link between the Housing Market and Inflation?
It doesn’t appear to be at first glimpse. Consumer spending determines inflation, whereas demographic changes, building, and supply determine houses. However, inflation and accommodation often seem to follow the same route over time due to salaries and interest rates.
Inflation frequently raises wages, which raises expenditures for renting and buying. Inflation also occurs frequently in low-interest-rate settings, such as those currently prevalent in the United States and Europe, where the borrowing costs are low. It increases the demand for real estate.
In theory, real estate should provide inflation coverage.
The assertion that property investment is a good inflation hedge appears plausible on theoretical considerations. All else being equivalent, during inflation, one would anticipate commercial real estate rents to rise in tandem with the cost of other components such as natural resources, commodities, or labor. Rents can be “labeled to market” through rental contracts or rent reviews.
Leases could also include clear and specific annual indexation of leases to a certain specified level of inflation and pre-set rent step-ups over the lease period. They may also permit expenditures such as running costs to be delivered through to tenants, thereby safeguarding the landlord’s net income.
Other factors will strongly affect the resilience of the connection between inflation and lease income growth, especially the market stability that determines whether property owners can raise rents in practice. The type of inflation is also important. We would expect any real estate demand – and rental prices – to rise if expenses are being pushed up by “demand-pull” from economic growth.
On the other hand, property owners would find it more difficult to raise the rent when “cost-push” inflation is expected to increase costs but not by an increase in demand. We would also predict the relationship to differ, considering how lease agreements are typically structured across nations and housing types. However, except for short-term distortions caused by the property market. We would anticipate income – and thus real estate values – to keep up with inflation.
Different Types of Real Estate Investments
While there are numerous ways to invest in property, there are three basic investment kinds for new and experienced investors.
1. Primary Place of Residence
You’re already in front if you own a residence. Inflationary times highlight the benefits of house ownership much more. As inflation drives up prices across the economic system, the property’s price is likely to rise in tandem. At the same time, you’ve committed to a fixed mortgage payment for the next 30 years. Which protects you from rising rental prices.
If you don’t already own your principal home, homeownership is an admirable goal. Though saving for a monthly payment may appear intimidating, several techniques can make homeownership more attainable.
2. Conventional Long-Term Rental properties
A long-term or conventional rental is a home rented for a longer length of time. A single-family home illustrates this, where a renter signs a one-year tenancy agreement and brings all of their decors.
The housing includes long-term rentals. Most tenants use their rental as their principal home, so it is a reasonable investment. This distinct feature of long-term rentals can help to provide steady returns in troubled times, particularly when inflation is high.
The spending plan for upkeep, repairs, real estate taxes, and insurance when investing in a long-term rental. You’ll also need a strategy for managing the estate. However, well-chosen property investment should pay for itself in income. And you will advantage from appreciation as the estate’s value goes up.
Bottom Line
In the United States, inflation is a normal part of life. Fortunately, you can prepare for inflation by building a well-diversified investment portfolio that includes investment properties.
In our existing fiscal environment, owning a principal home or investing in a short-term or long-term rented property will help you moderate the impact of inflation and expand your net worth, making it a tactical move.
