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Investing in Real Estate as a Hedge Against Inflation

By, Maura McGraw

Rising inflation is one of the biggest fears in the market today. By May, some economists expect headline inflation could be running at an year-over- year rate of 3.5% or more. By comparison, the headline rate was last at 2.5% in January, 2020. This begs the question, “what should you do to hedge against possible inflation?” 

First, let’s take a look at the basics of inflation: 

Inflation is defined as a sustained increase in the price of goods and services. In an inflationary environment, a gallon of milk that once cost $3 may now cost $4. Over time, inflation erodes the value of a nation’s currency. There are two primary drivers of inflation: economic growth and monetary debasement.

  • Economic growth can lead to inflation in rapidly growing economies as companies begin to raise prices for their goods and services. Because demand for these products increases, production increases, and production costs can increase, too.
  • Monetary debasement occurs when a country prints more money, also known as quantitative easing, which lowers the purchasing power of the currency, making it less valuable. This may occur during a financial crisis when a central bank attempts to lower interest rates to make it easier to lend money among other tactics.

Why are some financial experts sounding the alarm about impending inflation? 

Over the past two years, the Federal Reserve has kept interest rates low in an effort to stimulate economic growth in the economy. Additionally, the US government has injected a large amount of cash into the market in the form of stimulus in response to the COVID-19 pandemic. Some financial experts believe that these factors and others will result in rising inflation over the next 6-12 months. 

“There’s a real possibility that within the year, we’re going to be dealing with the most serious incipient inflation problem that we have faced in the last 40 years,” former US Treasury Secretary Larry Summers told Bloomberg News in February.

“Inflation will reach levels rarely experienced over the past decade, at close to 3% in mid-2021,” Oxford Economics chief U.S. economist Gregory Daco told the Wall Street Journal. “But uncontrolled overheating isn’t likely.”

What should you do? 

Several asset classes perform well in inflationary environments. Tangible assets, like real estate and commodities, have historically been seen as inflation hedges. 

Real estate is a popular choice not only because rising prices increase the resale value of the property over time, but because real estate can also be used to generate rental income. Just as the value of the property rises with inflation, the amount tenants pay in rent can increase over time. These increases let the owner generate income through an investment property and helps them keep pace with the general rise in prices across the economy. 

“We do fervently believe a collection of tangible assets will be an important inflation-fighting tool as inflation becomes more of an issue,” said Rick Pitcairn, chief investment officer of Pitcairn, a family office with $3 billion in assets.

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