- Inflation is making life more expensive
- Investing your money could help you avoid long-term detrimental effects
- You’ll want to select your investments carefully
- Real estate remains a solid investment
Inflation is causing financial panic all over the world, and you might be wondering if real estate is a good investment in 2022. It’s wise to hedge against inflation by investing your money because it protects you against the drop in the currency’s value.
Developing a diverse portfolio to guard your assets against the decreasing value of the currency is one way to offset your decreasing purchasing power. This guide will explain why real estate remains a solid investment despite inflation making properties more expensive.
What Is Inflation?
Inflation is a rise in the price of goods and services available to consumers. The result is a decrease in purchasing power for individuals. This occurrence devalues the currency because one unit of money affords fewer consumer goods, so you’ll spend more to maintain your current lifestyle.
The inflation rate was 8.52% at the end of July 2022, meaning the Consumer Index Price for All Urban Consumers increased by that amount over the previous 12-month period. Inflation makes life more expensive for the average person, creating a challenging environment for protecting your assets’ values.
Causes of Inflation
Inflation in 2022 has numerous underlying causes, many of which trace back to the COVID-19 pandemic. It’s worth noting that the current bout of inflation is unique because of its sharp ascension associated with lifting restrictions in many Western countries. Some specific causes include the following:
People stayed home early in the pandemic, and oil prices dropped considerably in response. Early 2021 saw energy prices return to pre-pandemic levels, but demand recovered more rapidly than supply, creating a shortage. Russia’s invasion of Ukraine has put further strain on global fossil fuel supplies, furthering the energy shortage and driving prices upward.
Low Interest Rates
The US Federal Reserve lowered interest rates early in the pandemic, with the federal fund rate ranging from 0 percent to 0.25 percent. These lower rates made it easier for households and businesses to borrow from banks but also flooded the market with cash when the supply for many goods was low. Having this extra money available reduced the value of the dollar, partially driving inflation over the last year.
Supply Chain Issues
It’s more challenging than ever to find certain goods because of supply chain issues. The lack of warehouse space and delivery drivers is creating bottlenecks, too, all of which drive inflation. Groceries are also more expensive because of the supply chain problems, particularly in wheat and corn, which typically come from Ukraine.
Fewer employees are available, and the staff sticking around at jobs are demanding higher wages. The result is businesses struggling to keep up with demand and charging higher prices to compensate.
It’s impossible to pinpoint a single cause of inflation because the economy experienced so many ups and downs during the pandemic and the Russia-Ukraine war that followed. Developing a plan for protecting your assets against the unforeseen is recommended moving forward.
5 Reasons Real Estate Is a Good Investment during Inflation
Real estate investment remains a solid bet during inflation for various reasons. Home prices are higher, but you’re still likely to see a positive return on your purchase over its duration. Benefits of real estate investment in 2022 include the following:
1. Home Prices Outpace Inflation
There could be situations where inflation outpaces your home’s value over the short term, but this usually doesn’t last. Home prices typically keep up with inflation over long periods, protecting your investment. Colin Lizieri, an economist and professor of real estate finance at the University of Cambridge, reports that real estate often outpaces inflation by 2–3 percent in the long run.
2. Limited Supply Increases Values
There’s a shortage of available homes in the United States, with one estimate suggesting the country needs to build at least three million additional houses to meet current demand. This demand is driving increased valuations and higher occupancy rates.
3. Rent Prices Are Up
The 8.52% inflation rate seems high, but rental prices are up 10-14% over 2021. The limited supply of homes makes it hard for renters to find places to live, driving up revenue for landlords. This trend makes buying a rental property a solid plan because the demand should be present for a while.
4. Dynamic Cash Flows
Real estate is different from other investments because your cash flows are dynamic. Bonds allow you to generate fixed cash flows, but your real estate income stream will likely increase over time as rents increase. You’ll eventually pay your mortgage off, as well, creating significant monthly income.
5. Increasing Prices Build More Equity
Your increasing home price helps you build more equity. You can then take a low-interest loan against the property if you need it while retaining ownership of your rental property. Your renters are putting money into the home while it builds equity, so your investment is minimal after the initial purchase.
The only downside of real estate investment during inflation is the increased cost, but you’re still very likely to earn a significant return. Buying sooner rather than later allows you to begin banking equity and improves your cash flows over time.
Buying Property in the D.C. Area
Buying a rental property can create extra work in your life because you’ll have to maintain the place, collect rent, and negotiate lease agreements. You could also find yourself dealing with problem tenants from time to time. Hiring a property manager to assist with your investment is one way around these issues, as it puts your rental on autopilot while it builds value.
Nomadic Real Estate offers property management services in the Metro D.C. area. Our team will maintain relationships with your tenants, screen applicants, handle maintenance requests, and ensure you comply with local laws. Contact Nomadic Real Estate for more information about your Greater D.C. property management needs.