An inflation hedge typically involves investing in an asset expected to maintain or increase its value over a specified period of time. That’s why real estate is considered a hedge against inflation, since home values typically increase during the times of inflation.
It is also an investment that is considered to provide protection against the decreased purchasing power of a currency that results from the loss of its value due to inflation.
Increasing money supply causes inflation hence the increase in house prices … when interest rates are low however, buying homes can be more affordable and increase the demand for homes. If the supply of homes remains constant and the demand increases, then the price of homes will increase.
You see, hard assets are investments with intrinsic value such as oil, natural gas, gold, silver, farmland. Natural colored diamonds and commercial real estates.
Like oil or gold, real estate is a commodity, meaning, there is a limited supply and therefore it has an inherent value by serving a basic human need. On thinking about a property in terms of the different commodities of which it is made… we have, the building and the land with its constituents.
Ultimately, there is a limited amount of land in the world. The building itself is a combination of different raw materials. If the price of those materials goes up, the cost to build similar building increases, in turn making the existing property more valuable.
Someone may ask why hard assets are considered a worthwhile investment/ typically, hard assets are an excellent hedge against inflation., meaning their value rises as the general price levels for goods and services increases. This is known as Consumer Price Index or CPI)
Let me tell you this: commercial property is a unique investment class when compared to other hard assets in that not only does it typically preserve its value during periods of inflation, but leased commercial property can also be an income producing asset, paying dividends back to investors. Most people do fear inflation but this is not the case with real estate investors as this is a great advantage for them. Investing in properties is an excellent hedge against inflation as the price level goes up, so does the rental income you get from your property and your investment’s value. This implies that real estate investors are always above the immediate and the long-term effects of inflation.