There's been a lot of talk and speculation in the news lately about the forecast of our monetary system in the United States. One expert says we will see high inflation and the next says it will be deflationary and yet another says stagflation. While no one can know for certain what the future will bring, for educated real estate investors, it's wise to understand how real estate inflation works, how a high inflation market can impact your assets or debt, and the best way to hedge inflation.
Over the past 10 years, the average rate of inflation in the United States was 1.8%. This has been the average over the last decade, but many experts are now calling for higher than normal rates of future inflation due to the impacts of COVID-19 on the economy. Shuttered businesses, people out of work, and large injections of stimulus money from the federal government have set the stage for an unprecedented scenario. Whether the United States sees near-normal rates of inflation or abnormally high ones resulting from these distortions in the normal economy is still to be seen. Regardless of the current economics, there are things real estate investors can do for inflation hedge so their real estate portfolio thrives under these conditions.
What is inflation?
Inflation is an average increase in the prices for a collection of goods and services in a given economy over a set period of time, usually calculated by year. Essentially, it's the decrease in the purchasing power of the dollar over time. Taking the average rate of 1.8% inflation, the $400 washing machine you bought last year will likely cost you an additional $7.20 today. While that may not seem like much, when you add costs up for all your purchases, including groceries, gas, phone bills, massages, etc. over a year, you'll have a much higher number and higher cost for goods over time. If a country experiences above-average inflation, it could have an even bigger impact. For example, Greece had inflation nearing 5% in the past decade, meaning that same $400 washing machine would cost an additional $20.
It’s important to note that inflation is not appreciation. An appreciation rate, as it relates to real estate, is the increase of a property’s value over time. With appreciation, value does not increase in relation to the currency, it increases based on demand. You can have scenarios where a home appreciates more than the inflation rate, and alternatively you can have it depreciate in an inflationary economy.