Real Estate: A Hedge Against Inflation?
Today, you will see prices of essential items higher than they have ever been when you go shopping. Food prices have risen 6.3% as the cost of gasoline and oil both jumped almost 50%. In a situation like this, can real estate really save you from inflation?
In the case of those who are looking for a new home, inflation has created a housing unit gap that shows the imbalance between house building rates and the population growth rate. November 2021 saw more than 6 million people buying houses. On the other side of the market, the Case Shiller U.S. Home Price Index showed an 18.6% increase in housing prices.
The pandemic particularly influenced inflation rates by disrupting supply chains and causing global shutdowns, resulting in the U.S.’s housing inventory falling to its lowest levels in 2021. Furthermore, the real estate industry struggled with lack of supplies, rising prices of building materials, and growing labor costs. The situation was made worse with policy issues, making construction projects harder to accomplish.
The pandemic created a consumer preference in spending more on goods. In fact, September 2021 saw consumers using about 22% more money on goods compared to before the pandemic. This excessive spending by the population led to a disruption in the supply and demand that has resulted in today’s troubling inflation.
This inflation will most likely continue for a while and have significant consequences. It would be ideal to see the effects of the pandemic be reduced enough to return supply and demand as well as supply chains back to normal while fixing production. However, we will most likely see demand and construction costs remain relatively high.
However, this provides a chance for people to invest in real estate, which is a long-term investment that can provide returns. Even the metaverse is offering real estate investments, although it is still a tentative venture. Considering the possibility of a future with even more decreasing inventory of sellable homes and increasing interest rates further dampening demand, investing in an asset like real estate, which is resilient to inflation due to how rental income rises as property values increase when inflation does, could help you hedge against inflation.
