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With Inflation, Why is Real Estate a Safe Bet?

Arjun Gupta
July 6, 2022

Now, more than ever, it is essential to understand how inflation will affect the market. Because there has been a lot of buzz and speculation surrounding the future of the United States’ economy, investors are hesitant, trying to figure out which type of investment will lead to consistent returns. Given that the country is going through an inflationary period, economists say that real estate might be the hedge against inflation.

At first glance, inflation and real estate do not seem to be related as inflation is based on the prices of consumer goods whereas real estate is based on construction costs, supply and demand, and overall demographic trends. However, in the long run, real estate pricing and inflation tend to move in the same direction as a result of increasing interest rates and wages. It is known that inflation increases wages to accommodate for the price increases of consumer goods. This leads to an increase in disposable income. Although disposable income is increased, inflation of other goods and services take away from money allocated to purchasing a home. In addition, during periods of high inflation, it may be difficult to get a mortgage as rates are increasing. Therefore, buyers have less purchasing power, and this results in consumers renting as opposed to buying. This causes a surge of demand for rental properties, which triggers landlords to increase their rental rates. Furthermore, housing prices tend to skyrocket in an inflationary economy. Real estate possesses intrinsic value as people need to live under a roof. For that reason, if you are able to offer fair rental rates and favorable terms, real estate is a safe bet for your investment portfolio even during times of inflation.

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