Shielding Your Wealth: How Real Estate Can Protect You from Inflation
With residential real estate prices rising continuously since 2013, investors are turning to this asset class as a hedge against inflation. Here's why.
Real EstateInflationWealth CreationHedgeInvestmentReal EstateJun 13, 2024
Inflation, the gradual increase in the general prices of goods and services, erodes the purchasing power of money over time. However, real estate investments can generate rental income, which potentially grows over time in response to inflation. As the cost of living rises, landlords typically adjust rental rates, providing a natural hedge against inflation.
Moreover, investors can leverage their real estate assets to borrow funds for further real estate acquisitions. During inflationary periods, the cost of borrowing (interest rates) typically rises. However, investors who have secured fixed-rate financing before inflationary pressures set in can benefit from lower borrowing costs in real terms, enhancing the profitability of real estate investments.
The supply-demand dynamics of the real estate market also contribute to its ability to outperform inflation. In the last decade, there were periods when the supply of real estate exceeded demand, resulting in stable price growth that kept pace with inflation. However, following the pandemic, residential real estate saw rapid recovery, leading to significant price growth that has outpaced general inflation.
ANAROCK Capital, a leading real estate consultancy, has reported that average residential prices across the top 7 cities have appreciated at a Compound Annual Growth Rate (CAGR) of 6% since the 2019 elections. This trend is expected to continue, driven by steady population growth, urbanization, and rising housing demand.
ANAROCK is a leading independent property consultancy that provides expert advisory services to clients across the real estate spectrum. With a strong presence in India and the Middle East, ANAROCK has established itself as a trusted partner for investors, developers, and occupiers.
Frequently Asked Questions
Why is real estate a good hedge against inflation?
Real estate is a good hedge against inflation because it can generate rental income that grows over time in response to inflation, and investors can leverage their assets to borrow funds for further acquisitions.
How has the real estate market performed in recent years?
The real estate market has seen significant growth in recent years, with residential prices rising continuously since 2013 and appreciating at a CAGR of 13% in the last two years.
What drives the demand for real estate?
Steady population growth, urbanization, and rising housing demand drive the demand for real estate.
How can investors benefit from fixed-rate financing?
Investors who secure fixed-rate financing before inflationary pressures set in can benefit from lower borrowing costs in real terms, enhancing the profitability of real estate investments.
What is the role of supply-demand dynamics in the real estate market?
The supply-demand dynamics of the real estate market contribute to its ability to outperform inflation, with periods of stable price growth giving way to rapid recovery and significant price appreciation.
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