You may have heard that inflation, as measured by the Consumer Price Index (CPI), rose 0.8% in April, after rising 0.6% in March. Overall, the CPI is up 4.2% since April 2020 — its sharpest increase since 2008. While this is in line with economists’ expectations, many individual investors wonder whether this trend is transitory, or if it will lead to a period of high inflation, and potentially erode net portfolio returns. These concerns have stoked market volatility; the Dow Jones fell about 2% following news of the latest CPI report.
There’s no doubt that the COVID-19 pandemic has (at least temporarily) changed consumer spending habits. For instance, over the past year, consumers have spent less on transportation, hotels, and recreation, and spent more on groceries and beverages. But as more states begin to reopen and Americans spend their stimulus money, demand may shift. This pent-up demand will likely cause prices to increase, even more so if there are lingering supply chain disruptions.
With a higher-inflation environment possible over the next few quarters, it’s a good time to revisit how private real estate investing provides a hedge against inflation.
Real Estate Holds Intrinsic Value
Real estate holds intrinsic value because it is scarce. Particularly in dense, urban neighborhoods, there may be a limited supply of properties, and a lack of available land to build new structures on. This is good news for current property owners, as demand for real estate does not generally decrease, even when inflation rises. In fact, the value of an existing property might increase, given the rising cost of materials and labor to build a comparable structure.
The Historical Effect of Inflation
Historical data shows that real estate has been somewhat effective as a hedge against inflation. This was true even in the 1970s and 1980s, when inflation was at a record high due to low job growth and high unemployment. That said, some asset classes may still fare better than others. In times of high inflation, longer-term projects that rely heavily on cash flow to deliver returns are at a disadvantage. You can read more here.
It is currently an excellent time to be both a buyer and seller in Manhattan. Buyers can take advantage of low mortgage rates and pricing that is still below the peak. Sellers can take advantage of incredible buyer demand and rising prices. We will continue to update you on the ever changing market environment.
Thinking of buying or selling, Schedule a time to speak with our team by visiting our Calendly page. We’ll reach out to confirm. We look forward to chatting!