Main Content

Watches, Cars, or Real Estate:Which is the best hedge against inflation?

A normal economy consists of fluctuations; ironically, consistent economic changes are constant. However, it is no surprise that, amidst a global pandemic, the fluctuations, particularly the inclines, can look more drastic causing what we coin as “inflation.”

Before we dive into suggestions on what to do about our current economic climate, let’s take a deeper dive into why we have been experiencing such high inflation. Michael Todd, Owner & CEO of OnPoint Financial Management shared more about this from an economic standpoint: “Like it did to most aspects of our daily lives, the 2020 lockdown of our country in response to the COVID-19 pandemic drastically affected the prices of goods and services. When people stayed home, they stopped purchasing everyday luxuries like eating at restaurants, attending performances, and taking trips. This dip in profits for some industries was met by a spike in revenue for others because of supply chain issues. A perfect example—buying cars and furniture. Not only was the production of these goods delayed, but the craftsmen who produced them were also laid off during the shutdown”. Michael went on to explain how these two contrasting phenomena, created a drastic decrease in value of some goods and an increase in others, which has led to a more volatile market.

In addition, inflation can also be a result of too much-printed money. When there is too much money to use, but consistently sparse resources, we start to see too much money chasing too few goods; thus, prices per item increase. Taking into consideration what contributes to inflation, and given these uncertain times (and what feels like a never-ending pandemic), the question of how to combat uncertainty and fluctuation in an ever-changing economy becomes a priority for many.
One means of minimizing the financial impact of inflation, or economic fluctuations generally, is to include “hedges” in one’s portfolio. Hedges are assets that are less subject to volatile market value loss. One significant type of asset to consider in combating inflation is real estate.

With inflation rising 6.8% over the 12-month period between November 2020 and November 2021, an increase unseen since the early 1980s (U.S Bureau of Labor Statistics) investors are more eager now than ever before to put their money into hedges, especially into assets that will either increase with inflation or grow faster than the rate of inflation. Real estate has historically proven to be one of the best forms of investment during inflation.

Though costs during inflation are generally higher, the asset of a property is long-standing, as opposed to consumption-based goods. During inflation, the concept of a loan can appear daunting. However, the effect inflation has on a mortgage can offer long term benefits. As a home’s price increases over time, the loan-to-value of mortgage debt naturally decreases. When you borrow money for real estate or mortgage purposes during inflationary times at a lower interest rate than that of inflation, you have an advantage. Given that you are borrowing for a hedge against inflation, rather than a consumption good, you will be paying off said loan long term, but with debased dollars. Therefore, while your asset’s value increases, your mortgage payments remain consistent. Essentially, you are getting a better deal for a valuable asset. All in all, real estate is an investment that offers a long-term return.

If hedging inflation through real estate sounds interesting to you, what are the next steps? First and foremost, selecting the right real estate team is crucial to the success of buying or selling. I bring a unique perspective to real estate with over 12 years of experience in Private Wealth Management with Wall Street firms such as Goldman Sachs and as a seasoned real estate consultant for over 25 years. My mission is to create wealth for my clients through real estate. For a complimentary consultation please email [email protected]
[email protected] or call 213.408.9912. Full disclosure. The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

10 Connect With Us

Keep up to date with the latest market trends and opportunities in Los Angeles.