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 that 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 loan. 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, studies documented similar outcomes for private real estate. After reviewing the National Council of Real Estate Investment Fiduciaries Property Index over 43 years, researchers determined that private real estate delivered strong and long-lasting total returns despite years of inflation.
Building Equity Over Time
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, advisers and investors view real estate as favorable because it withstands economic disasters, such as inflationary periods, better than many other investment opportunities.
In fact, investors anticipate that real estate will play an even more vital role in portfolios due to its variety and the ability of different types of real estate to act as a hedge against 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 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.
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