Real estate has historically been a good hedge against inflation, with real estate values growing at a slightly higher rate than the inflation rate over the last 55 years. However, as home-price growth starts to revert, some are wondering if now is still a good time to invest in real estate.
Here's a closer look at how decades-high inflation is impacting the changing real estate market and if it's better to buy now or wait.
Inflation impact on the real estate market
Inflation surges aren't just felt in the grocery store or gas station. High inflation impacts the cost of goods and services for virtually everything -- including real estate and real estate investments. Things like energy costs, water, property taxes, and property insurance rise when inflation is up, which impacts an investment's operating costs.
Thankfully, rental growth has well out-paced inflation. Therefore, investors should be able to cover the increase in costs for owning and operating a rental property. Real estate inflation, which relates to the value of the property, has also outpaced the rate of inflation over the last few years, growing as much as 19% year over year. This makes real estate a great hedge against inflation for the time being.
However, the rate of price growth is now slowing, meaning home-price growth in the coming months may not be enough to beat today's inflation rate of 8.5%. The National Association of Realtors saw home prices grow by 10.8% from July 2021 to July 2022, although prices were down from June 2022's record peak. Rental growth is also slowing, down month over month.
Interest rates are also impacted by high inflation. The Fed has already raised interest rates several times and indicated it intends on a few more hikes before the year's end. A rising interest rate environment makes the cost of borrowing more expensive, which can impact the bottom line of an investment and diminish its earnings.
Higher interest rates don't just impact those buying an investment property. They also impact real estate investment trusts (REITs) because REITs use high amounts of debt to leverage their portfolios.
Image source: Getty Images.
Should you buy now or wait?
It seems real estate values and rents are still outpacing inflation, making it a worthwhile investment right now. However, investors should carefully consider buying an asset in a falling housing market. Prices will eventually rebound, but there's a chance the value of the property and demand for rental real estate could fall temporarily, which wouldn't diminish the shelter from inflation.
Inflation did inch lower in July, meaning investors could get some relief soon. Rather than sitting on the sidelines waiting for prices to fall or inflation to return to more normalized levels, investors should take advantage of where the market opportunities are today.
Inflationary pressures and rising interest rate concerns have beaten down share prices for loads of REITs. Given their dividend yields and long-term growth opportunities, many REITs can provide a higher rate of return than inflation when held five to 10 years or longer. Buying low almost always increases your chances for a greater return over the long term, and right now is the safer buy in the changing housing market.
