A strong post-pandemic market recovery led to a buying surge in recent times, with customers acquiring everything from new homes to cryptocurrencies and NFTs. Even though economies are coming back, inflation has reached 10-year highs due to this buying frenzy.
Hyperinflation
The mere thought of having to pay significantly more for everyday essentials can be scary. But the question is, why are prices suddenly going through the roof? If we could put it simply, we would say that there’s more money chasing fewer products.
As with everything during the previous two-and-a-half years, the pandemic is, in one way or another, linked to this latest inflation spike. More specifically, our super-fast return to normal life is at the heart of it. Restaurants, shopping malls, and other public places are open for extended periods, just like old times. People are travelling frequently, while work commute is picking up too, even if hybrid and remote employment are options.
In addition, the price hike has not stopped financially stronger groups from splashing the cash whenever they want to. While it is great to see economies around the world recovering from the ravages of COVID-19, there is a potential fallout.
People had been saving more since the onset of the coronavirus. Specifically in the UAE, the collective amount held in savings accounts with the country’s lenders surpassed Dh9.5 billion by April 2021. That number has gone up considerably since.
However, it seems like many of us are now spending in a hurry, as if trying to make up for lost time during all those months of social restrictions and lockdowns. Spending too much too fast can have disastrous consequences for economies. The excessive demand would only lead to higher inflation.
Is real estate the answer?
Investing wisely in real estate in the right communities at the right time can provide a hedge against inflation over time. In real estate, whether commercial or residential, the risk factor is low. A property can be rented and put to several uses and will continue to appreciate in value over the long-term.
Real estate can turn the tide in your favour during inflation. As a result, your income would increase with the rising prices. The effect of inflation on the housing market is generally two-fold. For starters, property prices increase when there is an inflation surge. Because homes turn more expensive, so many potential customers are priced out of buying.
As a result, these people are likely to turn to renting for the time being. This, in turn, drives up the demand for rental properties. Consequently, the rents of such units also experience an upward push.
Perfect hedge to inflation
Over time, a real estate price hike reduces the loan-to-value ratio of any mortgage debt. When this happens, your equity on that particular property increases even with the fixed-rate mortgage payments staying on the same level. Hence, you get a sort of ‘natural discount’.
Furthermore, inflation is highly beneficial for real estate investors who have rented out properties. This is especially true for assets operating on short-term lease arrangements, such as multi-family properties, because they tend to renew leases every year. Rents tend to be higher when home prices increase.
Hence, if you can adjust the rent upwards while maintaining the same mortgage, this provides an opportunity to earn more money.
Besides, regardless of inflation, property prices tend to follow a steady upward trajectory over time. For instance, most of the homes that hit rock bottom when the real estate bubble burst in 2008 were back to their pre-crash value in less than a decade.
Inflation has various unavoidable aspects such as rising interest rates and costlier consumer goods. Nevertheless, real estate is a good way to shield yourself from some other influences of this price hike.
While investing for your future, analysing inflationary effects on your assets can help mitigate them before the value in your savings accounts and retirement funds goes down significantly. By investing in income-generating real estate, you can hedge your bets against inflation and protect your assets for the long haul.
