How can property investors hedge against inflation?

By Noemi Pamintuan-Jara 01 April 2022 | 1 minute read

With Australia’s inflation predicted to hit 4.5 per cent this quarter, property investors are expected to shift to high gear in the coming months as they seek a hedge against rising inflation, experts said.

According to Pete Wargent, co-founder of BuyersBuyers, when a currency’s value is anticipated to drop, investors turn to inflation hedging to protect their investments from inflationary climates.

“Cash is not a happy place to be when it is devaluing so quickly. So gold, precious metals, farmland, residential land and real estate are all asset classes where investors will look to put their capital to work later this year,” stated Mr Wargent.

The co-founder has given this statement off the back of pandemic and government stimulus programs that saw households accumulating $250 billion in savings over the last two years.

Looking at historical data, Mr Wargent noted a period in the mid-1970s when inflation peaked at 17.5 per cent and house prices reached sky high in big capital cities.

“The median price of a house in Sydney increased from $18,700 to $68,850 over the course of the decade, for an increase of well over 250 per cent, while real unit prices in the harbour city boomed, recording a nominal increase of over 300 per cent,” he said.

He added that during the same decade, the median house price in Melbourne climbed by more than 200 percent, showing that house prices are well ahead of the rapid rise in consumer prices.

The economic environment is different now, Mr Wargent acknowledged, given that interest rates are far lower than in the 70s. But still, he reiterated the anticipated action of investors: “We expect to see property investors looking for an effective hedge as the headline rate of inflation potentially pushes towards 5 to 6 per cent later this year.”

BuyersBuyers chief executive Doron Peleg has concurred with Mr Wargent and has noted possible double-digit rents rise and yields of at least 4 per cent in 2022, making this investment class attractive to investors.

Despite fixed mortgage rates rising, Mr Peleg has touted alternative options for financing.

“Large institutions have been busy cutting their variable mortgage rates down towards 2 per cent in March to date, while many lenders are still offering variable mortgage rates below 2 per cent for qualifying borrowers,” Mr Peleg said.

While the two experts highlighted the benefits of real estate as a profitable option to hedge against inflation, they have also cautioned buyers to keep buffers when purchasing a property.

“Borrowers should still consider whether they can afford repayments down the track if interest rates were to rise significantly. We will see negative real interest rates for the time being, but that dynamic clearly won’t last forever,” warned Mr Wargent.

“Overall, this year’s election pledges appear likely to be far more supportive of the demand side for housing, at a time when there is a chronic shortage of rental properties. Investors will naturally seek a hedge against inflation in such an environment.” 

RELATED TERMS

Inflation

Inflation determines the decline of purchasing power for a given currency over time, as well as the general level of price for goods and services.

Real estate

Real estate is a type of real property that refers to any land and its permanent improvement or structures that come with it, whether natural or man-made.

Real estate

Real estate is a type of real property that refers to any land and its permanent improvement or structures that come with it, whether natural or man-made.

About the author

Noemi Pamintuan-jara

Noemi Pamintuan-jara

Noemi is a journalist for Smart Property Investment and Real Estate Business. She has extensive experience writing for business, health, and education industries. Noemi is a contributing author of an abstract published by the American Public Health Association, and Best Practices in Emergency Pedagogical Methods in Germany. She shares ownership of the copyright of an instructional video for pharmacists when communicating with deaf patients. She attended De La Salle University where she obtained a double degree in Psychology and Marketing... Read more



How can property investors hedge against inflation?
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