Inflation has been on the rise in recent months, leading to concerns about the impact on investments. Despite hopes that inflation would begin to recede, higher-than-expected CPI data shows that inflation remains one of the major concerns of 2023. Markets did not respond well to this news, and while no one knows what lay ahead, investors want alternative investment options that offer excellent returns and provide some protection from inflation and the volatility of an uncertain market. This blog post will explore why real estate investments have stayed strong despite rising inflation and what this means for investors.
What is inflation?
Inflation is the sustained increase in prices of goods and services over a set period, resulting in a decrease in the purchasing power of a currency. Inflation affects all aspects of the economy, including the real estate sector. Real estate is particularly susceptible to inflation, as property values tend to rise as the cost of goods and services increase.
Past inflationary periods have left their mark on real estate, but what have investors learned, and is that helpful for the future? First, it is important to note that inflation comes in many forms, and the pressures and shocks that shaped past markets are not always perfect indicators of what will happen in the future. Inflation can rise due to long-term drivers, such as monetary policy, which does not resolve quickly. Other drivers, such as supply shortages stemming from lockdowns, may resolve faster. The good news is that no matter what pressures move the inflation needle, real estate investments are quickly adaptable to new environments.
How does it affect real estate?
Real estate has historically provided a strong hedge against inflation. The key to this hedge is the quick adaptability for real estate investors to re-price upwards in the face of rising construction costs, maintenance costs, and labor costs. Additionally, real estate is typically financed with debt, meaning today’s debts can be paid off with inflated dollars earned in the future.
It is especially important to remember that real estate has necessary value. In the face of rising costs and consumers dropping luxury or bonus items from their budget, housing is a basic human need. When daily life becomes more expensive, housing is unlikely to be cut.
How can investors protect their investments?
In a high inflationary time with volatility in many markets, diversifying into real estate could be the decision that helps your portfolio thrive while other assets struggle. Wild swings in the stock market frustrate hard-working investors, who watch significant gains disappear with each new headline. This year will not be without struggle in real estate, as buyers fight to enter the property market, renters struggle to find affordable options, and agents hustle to find buyers — but landlords will watch their rental prices rise. Real estate’s necessary value will be holding strong and adapt as the market shifts.