Real Estate vs Inflation: Should You Buy or Wait?

Inflation significantly impacts almost every aspect of our economy, causing the prices to spike over a specific period. These spikes are gradual and often get to a peak before they balance, with 2024 reaching a 3.5% inflation rate in March. This isn’t anything new, especially when we look at the great inflation of 1970 and the post-2007 market shifts. A new inflation period started in October, and the percentage was already up to 2.9% by December. Since this trend is only at the beginning, we can expect the prices to go even higher as the year progresses.

Real estate is no exception to this, and it has the potential to affect purchasing power while making borrowing more expensive. However, if you play your cards right, you can safeguard your portfolio and perhaps even capitalize on the rising trend. Real estate can become a hedge against inflation, especially if you already have the property purchased. In this article, you will learn more about inflation and real estate, allowing you to come up with a good strategy against it.

Understanding Inflation and Its Causes

No one is unfamiliar with inflation. For the most part, the phenomenon occurs when the price of services and goods goes up, reducing the buying power of money. All of a sudden, everything seems so expensive, mainly because we have the same income while everything is getting more expensive. As an investor, you need to understand the trigger of inflation and why it happens so that you can protect yourself against it.

1. Demand-Pull Inflation

More often than not, inflation happens because the demand for goods is higher than the supply. This causes the prices to go up, in an attempt for providers to outcompete others in their industry. For example, factors such as a low mortgage rate or population growth might lead to a surge in housing demands, requiring the construction of new homes. This would lead to inflation as more resources are used.

2. Cost-Push Inflation

Sometimes, the costs of producing new homes can be affected by other third-party factors. The prices of materials can go up, the average wage might go higher, or there could be a disruption in the supply chain. Of course, to keep themselves from experiencing losses, businesses often pass these costs over to consumers (in this case, the property buyer or tenant).

3. Monetary Policy & Money Supply Expansion

A bank’s attempt to control the money supply and modify interest rates to their benefit could also lead to an inflation spike. Moreover, if the money is printed in excess, the value of the dollar can lower, which in turn leads to a higher demand for products. To control this circle, the economic world responds with higher inflation, which ultimately surges the prices of homes.

4. Wage Inflation

Rising wages cause consumers to buy more since they now have extra resources to do so. This could lead to higher demand, including for property. On the bright side, wage inflation makes it possible for some to buy homes easily, but it could eventually lead to rental spikes and more expensive homes.

5. Global Economic Factors

Global events such as geopolitical instability, trade disruptions, or a commodity price rise could lead to another round of inflation. For instance, if the oil prices go higher, this can trigger inflation.

How Inflation Affects Property Prices

As inflation took root in the real estate industry, the real estate market had to go through some changes to keep up with the changes. Here’s how the industry took a hit, for better or for worse, depending on the individual involved:

1. Rising Property Prices

With the costs of services and goods going up, labor and construction materials are now more expensive. As newly-built properties are costlier to make, they are sold at a higher price. Existing homes are also affected by this, as the rates increase to make up for the higher-priced construction. Those who already have the property could benefit from this, but if you are planning to buy, you have to pay a higher price.

2. Increased Demand for Real Assets

The higher the demand for a piece of property, the better its perceived value is. For example, if educational or job opportunities bring more and more people into a city, this leads to a rise in rental or purchased properties, as more people are looking for places to stay.

3. Erosion of Mortgage Debt Value

Inflation can positively affect property prices for those who have fixed-rate mortgages. For instance, as the price of property goes higher, you could end up paying less on your mortgage compared to the final value of the house. If you use a tool such as the REI Lense calculator to narrow down a good mortgage option at the beginning of an inflation trend, you could end up paying less for the property value.

4. Higher Costs for New Homebuyers

Existing homeowners or those who make their move at the beginning of the inflation trend can benefit from an inflation rise. However, if you are a new buyer and want to buy property at the peak of inflation, you could face higher mortgage rates and home prices. This could pose various challenges in the long run.

5. Geographic and Market-Specific Variations

Some areas are more affected than others when it comes to inflation. For instance, if it’s a high-demand zone that has a strong job market, you are more likely to see a price hike. While less desirable areas could still see some growth, it doesn’t affect property buyers as much.

Real Estate as an Inflation Hedge

With the right strategy, real estate can serve as a hedge against inflation if you are an investor. Fixed-income investments and cash can lose their value, but real estate will become more valuable. This happens due to the inflation of goods and services, but also because people will constantly need a roof over their heads.

Real estate already has a good record for keeping up with inflation, including the following:

1970s Inflation

Back in the 70s, the United States went through the Great Inflation period that caused all prices to go higher. However, investors turned their attention toward real estate to act as a safety net, and the prices of property went up.

Post-2008 Recovery

The Global Financial Crisis was one of America’s worst economic drops since the Great Depression, triggered mainly by the housing market crash. This led to a time of inflation, boosting home prices.

Recent Inflation Trends (2020s)

Events such as the COVID-19 pandemic and other led to significant economic strain, increasing the demand with limited supply. As a result, house prices skyrocketed, and existing homeowners often benefited from the spike.

Risks and Challenges of Investing in Real Estate During Inflation

Real estate can become a hedge against inflations, but not without risks. Here are the main issues that investors faced in the past:

• Rising interest rates made property prices less appealing to invest in. Many protected themselves using fixed-rate mortgages, but it was still hard to qualify.
• Inflation increased monthly payments for both buyers and lenders. Unless they invested in affordable houses or multi-family properties, the costs were difficult to keep up with.
• Since real estate is not a liquid asset, it could take months to get a property off the market or find tenants. Investors were required to have a cash reserve to prepare for unexpected costs.

For the most part, timing was of the essence. However, a good strategy could help real estate professionals to keep up with inflation.

Real Estate Investment Strategies for Investors

Inflation can significantly affect the prices of property, but that doesn’t mean you should put an end to your investments. You just need to implement the right strategy so that you can maximize the returns as much as possible. Below are some approaches to keep in mind.

1. Long-Term Investment Perspective

Inflation never really stops. For this reason, a good way for investors to protect themselves would be to hold onto the property. As its value grows, investors could benefit more from selling a house in 10 years rather than flipping it immediately.

2. Diversification

When it comes to strategies for mitigating inflation as an investor, a diverse portfolio is the best way to go. You should spread your investments across different types of properties such as commercial, residential, or industrial. Similarly, you shouldn’t stick to just one geographic area, and some markets are more resilient (and can even prosper) compared to others. By balancing your portfolio, you can create a safety net against a potential market downturn.

3. Smart Financing Choices

Inflation mortgage rates are probably an investor's enemy, so a good strategy to bypass that is to opt for fixed-rate mortgages. If your mortgage is currently a flexible one, you should consider refinancing to meet your purposes.

4. Rental Income Optimization

As a landlord, you can adjust your property prices and manage leases to keep up with the economic changes. Consider setting renewable lease contracts, changing them when necessary to reflect the conditions of the market.

5. Location Selection

Investing in property located in a desirable area will likely fare you better during inflation, as it remains desirable for years to come. Go for cities with strong infrastructures, a diverse economy, and access to public services.

Conclusion

The decision to buy a property depends on the status of the inflation trend. If it is at its peak, then you might want to wait a bit until it drops. However, if it’s just starting, you should consider getting a fixed mortgage and investing. Inflation can benefit you, but only if you already hold ownership of the house.