How Real Estate Can Slow Inflation

How Real Estate Can Slow Inflation – When measured over an extended period, home prices have been increasing at a slightly faster rate than that of inflation. In fact, the most recent spike in inflation arose as the result of a sudden surge in home prices, which insulated homeowners in a way did not apply to renters. 

Fixed-rate mortgages and inflation

Now, if you obtain a fixed-rate mortgage, it could potentially safeguard you against the rise in inflation because you will make the same monthly payments toward your mortgage despite your home increasing in value over time. Also, if you choose to invest in a rental property while paying your fixed-rate mortgage, you are more likely to see higher returns over time.

With a fixed-rate mortgage, you will own your property, and as inflation rates continue to climb over time, the value of your home will increase as well. The same would be true of your rental amount, which means that you would be looking at profit margins that continue to widen over time. You’ll also be able to justify increasing the amount you charge for rent because the prices of goods and services naturally increase due to inflation as well. This will subsequently increase your return on investment too.

How inflation impacts real estate portfolios

By nature, inflation makes everything more expensive, including the materials that are needed for house-building construction. As such, inflation ends up being a factor that slows the supply of options within the housing market. From there, as the production of new construction slows down, the value of houses that already exist picks up pace. The increased demand and limited if not slow-moving supply of housing is a combination that often leads to more expensive home prices as a result of inflation.

What does this mean in the context of real estate portfolios? They thrive under inflationary conditions. This is because the increased need for rentals means greater demand for housing and the ratio of demand to supply becomes imbalanced, resulting in higher rental rates, which is favorable for landlords. Additionally, real estate embodies intrinsic value because people are always in need of housing, regardless of the state of the economy. This gives landlords another advantage in general but specifically during times of inflation.

Within rising-rate environments, real estate investments typically perform very well, and this is generally particularly true in terms of income-generating property and multifamily units. These housing options have exhibited the ability to yield net income during inflationary periods more so than other options, such as securities and other assets.

For as long as the industry recalls, real estate has been considered a major inflation hedge. In fact, back in 1979, the United States’ Consumer Price Index was 13.5% and the average dividend income from trading real estate investment trusts via the stock exchange was 21.2% in the U.S., which ultimately safeguarded overall buying power.

Furthermore, the same sort of outcomes were documented in terms of private real estate. After reviewing the National Council of Real Estate Investment Fiduciaries Property Index over the course of 43 years, it was determined that the total returns on private real estate were strong and long-lasting despite the presence of years’ worth of inflation.

While mortgage payments on fixed-rate terms do not tend to change over time, the growth of equity speeds up in noticeable ways. Since inflation lowers the value of money for the foreseeable future, real estate is viewed by advisers and investors alike as being favorable due to the way by which real estate withstands economic disasters, such as inflationary periods, in ways that many other investment opportunities do not.

In fact, real estate is in a position where it is anticipated to hold an even more vital role in portfolios because of how much variety there is and how all these types of real estate can act as a hedge in the face of inflation. But ultimately, there is an undeniable need for balance within real estate portfolios for the sake of increasing the portfolios’ ability to outperform, no matter the state of the economy at any given point in time.

Over time, real estate certainly offers investors with a far more reliable as well as predictable opportunity to increase their capital value protection in times of inflation. According to what we have seen unravel in the past, property investors typically come out of inflationary periods scot-free approximately 85% of the time. Residential real estate in particular caters to those in search of positive real returns and high levels of outperformance simultaneously.

Just keep in mind that the inflation-evading abilities of real estate are best for long-term owners who are more than prepared to stick with it amid the inevitable fluctuations of the economy for many years to come as well as inevitable real estate cycles.

Copyright, 2023

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William Hayes

As an attorney in private practice in Los Angeles County, California William Hayes provides extensive estate and tax planning services to individuals and businesses in Los Angeles, Pasadena, Glendale, Burbank and surrounding communities. Attorney Hayes’ primary focus is to help clients avoid probate, protect their assets, and provide for the security of their loved ones with a well-crafted estate plan. He believes in giving each client the time needed to explain his or her needs and wishes and then dedicates his efforts toward making the client’s desires clear in their final estate plan.

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