Real Estate Investment:
A Hedge Against Inflation

The Recent History of Inflation

If you possess base-level knowledge of economics, you probably know about the principles of demand and supply being a major component affecting the economy. Since the pandemic struck in 2020, the locking down of countries to brace tides of sickness contributed to a steep fall in household expenditure on services, and consequently pushed up a demand for goods, especially through e-commerce.

Additionally, unemployment has been on a downward trend because companies are rushing to hire back people post-pandemic offering higher salaries, thus increasing people's purchasing power, with product output struggling to catch up. This drastic shift out of balance, along with COVID related border restrictions, caused a supply shortage worldwide that companies are still scrambling to cope with. The post-pandemic pent-up demand, combined with supply chain issues, that got further fueled by the Russia-Ukraine conflict, has seen inflation rates soaring to a 40-year high as of March, with consumer prices jumping by a whopping 8.5%. Uncertainty about the future has also nudged people into a saving habit wherever possible, contributing to the accumulation of sizable chunks of investing potential.

The Rental Spike

Through 2020 and 2021, with work from home on the rise, most people moved out of populated cities like New York or relocated back to their family homes, pushing landlords to reduce rent and offer attractive incentives like free months on long term leases, but this course is now reversing in 2022. People are bored of staying home, and want back in on the action, which has seen a boom in the rental demand, causing a spike in prices citywide. This free market is seeing increases as high as 15 to 20% country wide, and to top it all, rents in New York rose by 33% between January 2021 and January 2022.

Renting vs Buying

An important question to ask yourself today is: why blow your savings on high rent, when it can be invested in a home of your very own? Rental rates may be facing an exhorbidant increase, but mortgage interest rates (while currently on the uptick) are still at historic lows. Keeping your debt installments the same while building your wealth can make a great hedge against inflation, and save you the moving costs and hassles involved with shifting from house to house every 2 to 3 years. If you manage to lock in a good interest rate now, the rate will stay the same for the next several years to come, but your equity builds and the value of your debt will reduce. It all boils down to the 10 to 15 or even 20% increase in rental prices vs a relatively minor increase in interest rates, and creating assets with buying an apartment vs purely throwing away money monthly when renting an apartment. There is also the added sense of security retained having your own apartment, eliminating risks of eviction and the stress of having to find new places periodically.

Create an asset or put down the expense of rent? The choice is yours.