If it feels like the cost of goods and services continues to go up, the likely culprit is probably inflation. Over the last few years inflation has started to have a broader impact on the economy, from your morning coffee to the gas you put in your car to commute to work. One of the best ways to hedge against inflation is through real estate.
Historically, real estate has been a great tool that has been championed by experts for its ability to withstand inflationary pressures. Today, people are turning to real estate to help combat inflation as it continues to impact the economy.
Even with rising inventory and a higher interest rate environment, real estate continues to be an effective asset people can turn to as inflation impacts purchasing power. If you are concerned about inflation, here are a few reasons why real estate may be the best tool in your arsenal to hedge against rising inflation.
1. Real Estate is a Tangible Asset
Inflation is troublesome for many reasons. One of the biggest reasons to watch what inflation is doing is because inflation can decrease your purchasing power, whether you realize it or not. When purchasing power begins to decline, investors often look to other assets that hold their value better against rising prices.
Real estate is considered one of the gold standard assets to combat high inflation because it's a tangible asset. While tangible assets like real estate can depreciate over time, they are still a physical asset so they aren’t really devalued by inflation.
2. Property Values Historically Outpace Inflation
Generally, real estate performs better against inflation over other investments like stocks, which are often negatively impacted by curbed consumer spending.
Inflation can also make it more difficult for investors to value companies. For example, as price increases make it hard to predict how companies can compete against peers or how they will grow in comparison to the market.
On the other hand, real estate values have historically outpaced inflation. Since real estate is considered a long-term investment, it can help preserve wealth over time.
3. Owning Real Estate Helps with Cost of Living
Another way real estate is a good method for hedging against inflation is that it can help you keep up with the cost of living despite rising costs. Investment real estate does well against inflation by providing investors with healthy streams of rental income which can keep pace with market price trends.
Similarly, people often use mortgage financing to purchase a new home. Those that have locked into a fixed-rate mortgage have a significant advantage over those that pay rent because their monthly housing payment won’t change. Comparatively, rent often goes up alongside inflation.
4. Shelter is a Basic Human Necessity
Lastly, consider that real estate is shelter, a basic human necessity. That means there will always be a demand for real estate, whether people choose to own or rent. Owning real estate is certainly more beneficial and has been found to be one of the biggest contributing factors to building generational wealth.1
No one likes to deal with inflation, but using real estate to hedge against rising inflationary pressures is a smart financial decision.
There are several reasons why real estate is the ideal asset to hedge against high inflation. Being a tangible asset, real estate values often provide more protection because they increase during periods of monetary devaluation.
Real estate is also a necessity meaning there is always demand for it in some capacity. While owning a home can help normalize your monthly housing costs, investing in rental properties can offer both appreciation and streams of rental income that can work in tandem to fight rising inflation.
1 Butler, I. (2022, September 21). How to Build Generational Wealth in Canada. The Motley Fool Canada. https://www.fool.ca/investing/how-to-build-generational-wealth/