If you have been paying attention to recent news headlines, you likely have noted that concern over inflation seems to be a recurring topic. It’s a simple fact of economics, the value and buying power of a dollar goes down over time as inflation increases. Inflation is the decrease of purchasing power of money, which consumers experience when purchasing daily goods. 

Do you remember when a gallon of milk used to be less than a dollar but is now over three? That’s inflation. It’s usually seen in the increase of prices of goods and services with time. Essentially,  your money today will not be able to buy as much as it once did. 

Inflation happens each year and must be planned for by anyone interested in maintaining or growing their wealth. But the level of inflation that the United States experienced in 2022 was far and above our typical levels. 2022 saw inflation rise by an astounding 7%. 

Why? Record low-interest rates have been a major contributing factor. Due to the economic impacts of the pandemic, the Federal Reserve held interest rates incredibly low, allowing institutions to access loans at nearly no cost. These low rates trickled down to end-use consumers (i.e. homeowners). For over a year, many borrowers have had access to mortgages at rates of sub 3%. 

To hedge against inflation, you must invest in asset classes that appreciate over time. Ideally, they should appreciate at a faster rate than inflation levels. This can be extraordinarily challenging when inflation is as high as 7%; however, a typically acceptable inflation rate is 2%. When economic conditions are normalized and inflation is low, many asset classes can hedge against inflation. However, when inflation is high and economic conditions are volatile, as we are currently experiencing, real estate investing becomes an ideal asset class to protect against inflation. Property prices typically increase over time, and investors benefit from cash flow. 

With mortgage rates still low, buyer real estate offers investors a comparatively secure, physical asset-backed investment. So why is real estate a good hedge against inflation? Because typically inflation and real estate prices tend to move in the same direction. A side effect of inflation is that wages usually increase as well, which drives up rental prices and home prices. Economist and Cambridge professor, Colin Lizieri, stated, “To the extent that wages capture inflation, there’s a clear link between house prices and inflation.”

Many investors who are looking for a stable investment class will turn to residential real estate. On average, housing prices in the United States have actually outpaced the rate of inflation. 

Many potential investors ask, is now a good time to buy? Undoubtedly, we are in the midst of an extreme seller’s market. As a result, prices are climbing quickly, and many are getting priced out of the market. If you’re aiming to hedge against inflation with a long-term investment, you should be diving into the real estate market. 

With the Federal Reserve’s recently announced interest rate hike, mortgage rates will subsequently go up over the coming months. Savvy investors should look to lock in loans at current rates for better returns and protect their wealth against inflation.