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Mada Partners > Blog > Is Real Estate a Good Shield During High Inflationary Times?
hedge against inflation

Amongst all of the other difficulties imposed on most of the world from the Covid pandemic, rising inflation is perhaps the most troubling economic effect. We have all observed inflation in action in a very basic way with rising food, fuel, and energy prices. One of the key impacts of inflation is the overall reduced real value of every dollar in your pocket.

Another side effect of rising inflation is the impact of rising interest rates. Often governing bodies (ie. federal banks) will increase base interest rates in order to try to keep inflation at bay. The problem is rising interest rates can lead to recessionary pressures on the economy.

During these times, investors are asking where they should be investing their capital. Is real estate a good shield during high inflation? Well, to be clear most investment vehicles are susceptible to some turbulence with high inflation. However, real estate may be a good vehicle to help shield against some of the negative side effects of inflation.

Here are a few shielding effects of real estate:

Rising inflation decreases buying power of the average person, which will reduce the number of buyers in the real estate market. That means the demand for rental units should be stable or increase.

Inflation also influences the price of housing, which typically means greater appreciation for real estate investors.
In many circumstances, inflation also impacts rental rates resulting in increased cash-flows from rental properties.
Mortgage payments do not change substantially over time, particularly with fixed-rate mortgages. However, the effect of inflation is the amount of principal paid back over time is worthless.

Of course, none of the above is a guarantee of success in using real estate to protect your investing capital. Every situation is unique and must be assessed accordingly. For example, some jurisdictions have strong tenancies laws that tie landlords’ abilities to increase rents, particularly for current tenants. Jurisdictions with looser restrictions on rental increases may provide greater shields for investment capital.

Before making any decisions regarding your investment decisions, it will be critical to obtaining all of the appropriate advice and information from your legal and financial advisors. Working closely with a team of real estate investors can also help your decision-making process. Moreover, working in a joint venture can also help you share the risks posed by inflation in any investing venture.

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