Land Real Estate and High Inflation
July 1, 2022 in AFM News
Inflation is a common term we are all hearing and experiencing in our everyday lives currently. Inflation is defined as a general increase in prices resulting in a fall in the purchase value of money. We are seeing this with food prices rising 10% over the past year, energy prices have risen 34%, and a general increase of all other items of 6%. It is costing each of us a lot more to buy the same things we need and want right now than it did just a year ago.
There are many factors that have contributed to the current level of inflation. We all stayed home and saved our money during the pandemic, and now are eager to enjoy those savings. The federal government injected a tremendous amount of stimulus into the economy during the pandemic, and there have been major supply shortages for many products due to labor required to produce items being in short supply and slowdowns in the supply chain to get those items we want or need to market. Most recently, the war in Ukraine has disrupted the supply of oil and gas, as well as the substantial agricultural exports of the country, adding more pressures.
Real Estate is an investment that has proven to historically be a good hedge against inflation. A “hedge” is a market strategy that is used to offset the risk of any adverse price movements in an asset. Real estate is considered a hedge because it normally does not follow financial markets; it is not typically an asset whose value fluctuates wildly and can help minimize losses in a balanced portfolio if there are big swings.
Real estate values tend to rise over time: there is a finite amount of land available which drives demand, and price appreciation, over time. Income producing real estate like timberland and farms produce periodic cash flows from rent or the sale of commodities grown on the land. These commodities tend to follow inflation and thus have become more valuable. For those with debt on the asset, inflation causes real estate values to rise but your payments remain fixed, increasing your equity in the property and lowering your loan to value ratio naturally. Inflationary periods are viewed as periods of uncertainty and there are few investments that one can make that are tangible like real estate. The owner knows their tangible land asset will remain while other investments may not, making capital preservation a big motivator during periods of uncertainty.
The case for real estate as part of a balanced investment strategy is strong, especially in the current inflationary environment. Real estate values are the strongest they have been since 2008. If you are considering buying or selling, AFM Real Estate professionals can provide the guidance you need to meet your goals and maximize current conditions to your benefit.