Real Estate Inflation: How Does Inflation Affect Real Estate?
Remember the mid-90’s when we thought we could live life king size if we had a few tens of lakhs? Fast forward to 2020, and the same amount seems barely sufficient for a few years. Now, what’s the reason behind this fall of the purchasing power of money? The answer is Real Estate inflation.
Inflation is the unforeseen and sustained escalation in the normal costs of goods and services over a while. For a better understanding, let’s understand inflation with an example. For instance, take a 30 year back scenario where people could purchase a lavish house for a sum of 20 lakhs. With the same amount, we cannot even think of purchasing a portion of a building. That is what exactly inflation is. It is a slow process that eventually erodes the value and purchasing power of money. This, in turn, decreases your accumulated savings, i.e., accumulated wealth.
How does Real Estate Inflation Work?
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 what it did a year ago.
The steady increase in pricing wouldn’t seem challenging if the purchasing power of a rupee increases alongside it, but that’s not the case with inflation.
Thus, individuals must make sure that they earn at a rate higher than inflation. One such earning strategy is investments. Investment in real estate to combat inflation is one popular option available as it appreciates against a currency during inflationary times. Apart from real estate, gold, commodities, and stocks in the consumer goods segment usually offer a good hedge against inflation in any portfolio.
Real Estate – 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. Three aspects that make real estate a great tool against inflation are:
- Appreciating value
- Increasing income (rents)
- Depreciating debt (if the property is financed)
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 remarkable aspect of investing in real estate, especially commercial real estate, is the cash flow generated from tenants. Investments in rental properties cover your monthly expenses, including your principal loan balance, interest, taxes, and insurance (PITI), but also generate enormous cash flow in the form of rents regularly. Also, rental properties, if managed wisely, can garner rent escalations annually, generating even more cash flow than your original investment. With this, you’re combating inflation that may occur, which can affect your taxes, insurance, and maintenance and various other costs.
Just as your real estate asset is appreciating, debt that you owe (i.e., if you take any) on the property will depreciate with inflation. When you use leverage or funding to invest in real estate, you get to experience this advantage of depreciating debt. Of course, your monthly repayment will be the same payment per month after year (assuming it to be an amortized loan). But, the value of that payment will fall as time goes on. So, this accounts for a positive outcome of inflation.
Owing to so many benefits, real estate stands apart as an anchor against inflation and helps people survive the inflation tide.
The Bottom Line
Many people do not understand the impact of inflation completely and may step forward unwisely. 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 investment like buy-and-hold real estate properties.
Assetmonk is one of such best platforms 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.
Real Estate Inflation FAQs:
Inflation is the sudden increase in the normal prices of goods and services over a period of time.
Real estate, gold, commodities, and stocks in the consumer goods realm typically offer a good hedge against inflation in any portfolio.
3 aspects that make real estate the best to option to beat inflation are:
- Appreciating value
- Increasing income
- Decreasing debt
Yes. The best aspect of real estate is the appreciation in the value which is actually higher than inflation. The asset’s value appreciates and produces huge amounts over a period of time.