Is Real Estate an Inflation Safe Haven?
Real Estate Investments Are Not Without Risks
With fears of inflation reverberating through the financial markets, investors are eyeing real estate as a potential safe haven. Residential real estate has been considered by some to be a safe investment during past inflationary periods. For example, in the 1970s home prices appreciated but stock prices fell.
Owners of residential and commercial properties tend to do better than stock and bond investors during periods of high inflation, largely because rents typically rise with inflation. Inflation also makes it more expensive to construct new homes and buildings, which means less competition for property owners. That scenario only plays out if the inflationary environment is protracted, which some economists do not think is the case this time around.
Inflation Expected to Be Short-Lived
With April consumer prices up 4.2% year-over-year, it is not surprising that investors are somewhat concerned about inflation. But many economists believe the increase in inflation will be short-lived.
Some analysts say current inflation trends are the result of government stimulus, production delays, and pent-up demand. Once these trends become less pronounced and the economy recovers from the pandemic more fully, it is likely that normal spending patterns will return, which should keep inflation at bay. If these predictions are correct, the trends could cause challenges for investors who have poured into real estate. To see real estate investments appreciate, part of the equation involves landlords raising rents.
Real estate has long been a way to hedge against inflation. In order for the strategy to work, generally the inflationary environment has to be long-lasting. It will be interesting to see whether that environment is short-lived as many analysts predict, or proves to be more protracted.
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