The dreaded "i" word: inflation. We've been hearing it more and more lately and have been feeling it in our wallets too. Almost all the goods and services we're accustomed to spending money on from gas and groceries, to lumber and appliances, have seen prices creep ever northward.
What is inflation?
Inflation is a decrease in purchasing power due to a sustained increase in the cost of goods and services.
Are real estate and inflation correlated?
According to a recent Bloomberg article, at first glance, they don’t seem to be. Inflation is based on consumer prices, while real estate is based on trends such as demographics, construction and housing supply.
In the long term, however, inflation and housing tend to move in the same direction due to wages and interest rates. With rising inflation, wages increase, which in turn increases consumers' budgets for renting and buying. And in low interest rate environments — like what we're currently experiencing, even with the recent mortgage rate increases — that increases the demand for property.
Why do people turn to real estate during inflationary times?
Real estate is considered one approach to hedge against inflation, because it often has little correlation with the stock and bond market. With the stock market, it can feel like we are at the mercy of its unpredictable swings and dips, but with real estate, there's more of a sense of control.
For one, when you buy real estate, it's not just an investment vehicle, but serves multiple purposes. You can live in it (since we all need to have a roof over our heads anyway), rent it out and generate cash flow, or make upgrades to it over time and add even more value to your investment.
As a result, investors and first-time homebuyers are still competing in this hot real estate market, even amidst a low supply of houses and increasing rent and mortgage rates.
