Real Estate Is Emerging as a Hedge Against Roaring Inflation
Posted on 27th Jan 2022
Those seeking alternative investments from stocks and bonds may turn to the housing market, but that strategy still presents risks.
Surging markets spurred a buying frenzy for everything from stocks and cryptocurrencies to new homes over the last two years. Now, with inflation at a nearly 40-year high and at least three priced-in rate hikes, the hunt for investing safe havens is on.
Real estate is considered one approach to hedge against inflation, given the asset class usually has little correlation with stocks and bonds. So naturally, investor interest is soaring — even against the backdrop of a super hot real estate market, a low supply of houses and mortgage rates threatening to creep up.
Nikodem Szumilo, economics associate professor at University College London and a specialist in urban economics and finance, said he’s received questions at least twice a week for the last six months about this topic.
“Inflation is pretty high, and increasing rates are not going to help right away,” he said. “So people are evaluating what they want to do with their savings.”
Some experts say buying real estate now — despite a hot and competitive market — is a good bet, given that mortgage rates are still low. Others say that because real estate is so localized, it’s case by case and rural areas might not offer the same prospects as large cities. But really, it comes down to an individual’s circumstances and investment time horizon.
Here’s a look at some questions investors — both professional and amateur — are weighing, and what experts suggest.
Are real estate and inflation correlated?
At first glance, they don’t seem to be. Inflation is based on consumer prices, while housing is based on demographic trends, construction and overall supply.
Yet in the long term, inflation and housing tend to move in the same direction as a result of wages and interest rates. Inflation often pushes up wages, which in turn increases budgets for renting and buying. Inflation also often appears in low interest rate environments — like in the U.S. and parts of Europe now — where the cost of borrowing is cheap. That also increases demand for property.
“To the extent that wages capture inflation, there’s a clear link between house prices and inflation,” said Colin Lizieri, an economist and professor of real estate finance at the University of Cambridge.