• The news these days is concerning: inflation is at its highest level in over a decade, the situation is volatile, and the future is uncertain. But what is the true story? Why is inflation such a concern these days, and how can you protect yourself from its negative consequences? The answer is Real Estate. But why is that? Does real estate beat inflation? Let’s dive in this article and find out. 
• Have you ever heard someone complain about the fact that two movie tickets and popcorn used to cost Rs. 5? They’re referring to inflation, which is the gradual rise in the prices of goods and services. Inflation is the unforeseen and sustained escalation in the normal costs of goods and services over a while. 
• To better understand inflation, let us use an example. Consider a 30 year-ago scenario in which people could buy a lavish house for a sum of 20 lakhs. With the same funds, we cannot even consider purchasing a portion of a building. This is exactly what inflation is.
• It is a slow process that gradually reduces the value and purchasing power of money. This, in turn, decreases your accumulated savings, or wealth.

How Does Inflation Affect Real Estate?

Like all things, real estate is not immune to inflation, and inflation does have an impact on the real estate sector. 

As inflation can erode all your accumulated wealth, the year-on-year growth in your accumulated savings must be higher than the inflation rate. If your accumulated savings are escalating at a lower rate or pace than the inflation rate, your savings stockpile will shrink.

The value of the rupee today will be lower than what it was at the beginning of the year. The rupee today, thus, will fetch lesser goods and services than it did a year ago.

How does Inflation impact the Real Estate Market?

• For property owners:

  Inflation is actually beneficial to property owners for a variety of reasons. The most obvious advantage is that the value of your home rises in tandem with the rate of inflation.

• Because supply is limited and demand is high, sellers can set their asking prices as high as they want and, in many cases, receive offers at or above their asking price. This makes it an excellent time to sell but a very difficult time to buy.
• Real estate prices will rise in response to the economy’s high inflation rate, as one would expect. The reasons for this are straightforward and straightforward.
• Developers will spend more money on new properties because construction materials will be more expensive. This will inevitably lead to an increase in the price of new real estate properties. Furthermore, because of the limited supply of new constructions, the value of existing properties will rise.

For potential investors

• If you invest in a property as a leveraged asset, especially with current financing rates so low, you will find yourself paying the same fixed rate even as the value of your property steadily rises.
• We are not yet seeing financing rates rise in tandem with inflation in this current inflationary market, and as a result, your return on investment (ROI) can be expected to skyrocket.

• Rents will skyrocket

  : One of the most noticeable effects of inflation is an increase in rental rates. Because mortgages are so expensive, most people will opt to rent rather than purchase. Because of the high demand for rental properties and the influx of tenants, landlords will be forced to raise their rental rates. Needless to say, owning a rental property in this economic climate puts you in a better position because tenants are willing to pay higher rents rather than take on an unmanageable mortgage.

• Borrowing will be more expensive

  : In general, an economy experiencing rising prices is not conducive to obtaining favorable loan terms. In fact, the cost of borrowing is quite high in these circumstances. Because inflation devalues the currency, most lenders are forced to raise interest rates. This is usually done to compensate for the losses caused by the decline in currency value. It’s also worth noting that the higher borrowing costs affect both buyers and developers. In fact, the majority of construction companies rely on loans to complete their projects, and an increase in interest rates will almost always result in higher property prices.

So, what does this all mean for investors? And how can a real estate investor profit from inflation? The following section will go over these two points in greater depth.

Does Real Estate Beat Inflation?

The answer to the question of whether real estate beats inflation, is this: A steady rise in prices would not appear difficult if the purchasing power of a rupee increased alongside it, but this is not the case with inflation.

Individuals must ensure that their earnings exceed inflation. Investments are one type of earning strategy. Investment in real estate is a popular option for combating inflation because it appreciates against a currency during inflationary periods. Thus, while real estate is affected by inflation, it can also be said to beat it from a certain POV. Aside from real estate, gold, commodities, and consumer goods stocks are typically effective inflation hedges in any portfolio.

What is the Real Estate Inflation Rate in India?

As per latest data from Forbes, the real estate inflation rate in India was 5.10% in January 2024. 

Real Estate: How Is It A Hedge Against Inflation?

Real estate has the potential to increase or at least maintain the value of accumulated wealth over time, thus providing a hedge against inflation. Now that we know how inflation affects real estate: three aspects that make real estate a great tool against inflation are:

• Appreciating value

• Increasing income (rents)

• Depreciating debt (if the property is financed)

• Appreciating value

One of the best aspects of real estate is the appreciation for the investment value. The asset’s value appreciates and produces substantial amounts over some time. For example, you can consider an investment of 30 lakhs on a real estate property. Assuming that property value appreciates by 6% annually for ten years from now, you can reap a final yield value of 53 lakhs at the end of 10 years.

• Increasing Income (rents):

The cash flow generated by tenants is one of the most impressive aspects of investing in real estate, particularly commercial property. Rental property investments not only cover your monthly expenses, such as your principal loan balance, interest, taxes, and insurance (PITI), but they also generate significant cash flow in the form of rents on a regular basis. 

Furthermore, if properly managed, rental properties can generate annual rent increases, generating even more cash flow than the initial investment. This helps to combat potential inflation, which can affect your taxes, insurance, maintenance, and other costs.

• Depreciating Debt:

Just as your real estate asset appreciates, the debt you owe (if any) on the property depreciates with inflation. When you use leverage or funding to invest in real estate, you get the benefit of depreciating debt. Of course, your monthly repayment will remain consistent year after year (assuming it is an amortised loan). However, the payment’s value will decrease over time. This explains why inflation has a positive effect.

Because of its numerous benefits, real estate stands out as an anchor against inflation, assisting people in surviving the inflation tide.

The Bottom Line

Many people do not understand the impact of inflation completely & are confused by how inflation affects real estate. Hence, they must equip themselves with the requisite knowledge, which will serve as an aid in protecting their wealth from any erosion. One of the best ways to fight and win the game against inflation is through inflation hedge investments like buy-and-hold real estate properties.

Assetmonk is one such platform that enlists real estate properties after thorough due diligence to make sure that it only delivers highly curated products to its investors. You can checkout Assetmonk’s various investment plans to kick-start your real estate investment carrier.