Investing in real estate during inflation
Inflation: Do real estate investments still make sense?
Inflation: Do real estate investments still make sense?
If you've saved up a bit of money, you have a couple of options on how to invest it. But if you're looking for a lower-risk investment that maintains its value, real estate is where it's at.
If you put all your hard-earned money into your savings account, it'll lose value over time. You can thank inflation for that. Inflation describes a general price level increase. The prices of goods and services rise yearly. As a result, you can afford less and less for the same amount of money.
It's not an unusual thing. The responsible central banks encourage some yearly inflation. However, the current inflation rate is three times higher than average. But how does that affect your real estate investment? What implications does it have for your mortgage? Does it even make sense to invest in properties during inflation? We'll answer all of these burning questions in the following article. You're on the go and prefer an auditory experience? Then check out the Urbyo Podcast episode instead. 👇👇
Should you still invest in real estate during inflation?
The current inflation rate is at 7.3%. A yearly rate of 2% is what experts call price stability. Inflation is even encouraged to a certain extent. However, the current number is more than 3.5 times higher. 4.4% is the prediction for 2022. The inflation rate hasn't been this high in ages.
The inflation rate is calculated based on the consumer price index — a collection of goods and services that private households purchase. Properties are not part of this index, but you should keep inflation rates in mind when investing in real estate.
Here's what happens to your money during inflation
The inflation rate becomes a problem when you have money in your (easy-access) savings account. It loses its value there, and it makes sense: If you have an inflation of 7.3%, it means that for goods that may cost 10,000 Euros this month, you'll have to shell out 730 Euros extra next month. In other words: You can afford less for the same amount of money in your account.
Investing in real estate is worth it despite inflation
When faced with inflation, you generally have three viable ways to invest your money: gold, stocks, and real estate. Putting your money in your savings account doesn't make sense anymore, especially during inflation. We believe that real estate is the worthiest investment during inflation. But why? Let's compare our options:
Stocks as an investment during inflation
Pro
Stocks are a valuable investment during inflation because you have the potential for value increase — unlike your savings account. You can partially compensate for inflation that way. The other perk is that you can buy stocks quickly, giving you more flexibility and agency during inflation.
Con
Unfortunately, stocks are also affected by inflation. Usually, you'd have a positive correlation between stock prices and bond prices. If one goes up, so does the other. However, people tend to shift their investments away from stocks and towards less risky bonds during inflation. That means your stocks are likely to lose value during inflation.
Gold as an investment during inflation
Pro
Gold might suit you if you're looking for a more stable alternative to a savings account. Gold is a safe investment option even when inflation rates go up. You're not likely to suffer any significant decrease in value.
Con
However, gold is so stable that you can't expect any significant value increase, either. You also won't get any regular earnings from gold, unlike withreal estate investments, especially once you've paid off your property and have rental income.
Real estate as an investment during inflation
Real estate maintains its value and is worth it
Because real estate offers a great mix of high value stability with a high chance of value increase, it's what we believe to be the best choice for you. Nevertheless, you should never put all your eggs in one basket and make sure you have a solid mix of different investments.
Rising construction costs: Bad news for my property investment?
A nasty side-effect of the current inflation: Construction costs have gone up significantly due to the rising costs of services and resources. A new building costing less than 5,000 Euros per square meter is not realistic anymore in many regions. However, this also means that the demand for existing buildings will remain stable and might even rise even more in the mid-term. The result?Higher prices for real estate in regions with growing populations. If you invest in real estate during inflation, you might achieve a higher return on your investment thanks to rising inflation rates.
Finding a property that hits that sweet spot is easy when you contact us. You don't need to know the area or research a lot. We'll show you the population estimate for the location of your property when you buy through us.
How to use the inflation to your advantage
While you purchase stocks with your savings, you finance a property through a loan. In other words, you have debt when you invest in real estate. How does the current inflation affect your debt, though? Believe it or not, you can benefit from inflation.
Here's how it works: Say you borrowed 100,000 Euros. With an inflation rate of 7%, the face value stays the same, but the real value of your money is now only 93,000 Euros. Your mortgage rate doesn't change for the fixed-rate period when choosing an annuity loan. If you have some money in your account and have an agreement with the bank, you can use inflation phases to make unscheduled repayments.
The impact of inflation on interest rates
Let's talk about the interest rate development during inflation. If you want to invest in a property, you'll probably need a loan. If you already have an annuity loan, this doesn't concern you. Your interest rate won't change anyway for your fixed-rate period. If you don't have financing yet and the inflation keeps going at high speed, you can expect rising interest rates in the not-so-distant future. Make sure to secure your financing as soon as possible. Our experts are always happy to assist you.
The real estate market when interest rates rise
It goes without saying that high interest rates impact the real estate market. After all, low interest rates have made the real estate market particularly attractive in recent years. If interest rates rise due to inflation, real estate prices in certain areas may stagnate. Nonetheless, several factors suggest that real estate will remain attractive as an investment.
Investors are reviewing their investment strategies and looking for investment opportunities with stable value. Stable-value investments such as real estate play a more critical role. Stock investments, for example, are often reallocated. At the same time, the withdrawal from stocks leads to more money in instant-access and checking accounts. However, as banks impose negative interest rates on these, real estate remains very attractive.
The general public seems to have a growing interest in real estate. Many tenants are looking to buy property to combat inflation-related rent increases with stable mortgage rates. And rising construction costs are making existing properties increasingly attractive.
Here's how inflation affects your property returns
That's all fine and dandy. But doesn't inflation reduce the return on your real estate investment? No need to worry. You can compensate for the rising inflation rate, up to a certain level, by charging a higher rent. If you use your property yourself, you can protect yourself from rising rents. Your rate remains the same for the agreed fixed interest rate duration.
The real estate market during inflation: a recap
How has the market reacted to inflation in the past? There have already been two instances of rising property prices ending after eight years in the 1970s and the 1990s. However, according to experts, the current price increase has been going on for 10 years.
Many don't believe there'll be an end to the rising prices soon. If you're an investor looking for a property to buy, you shouldn't hesitate. The earlier you buy, the more you'll profit from the rising prices.
So, is it worth investing in real estate now, despite inflation?
Real estate as an investment is sustainable, stable in value, profitable, and crisis-proof, even when faced with inflation. It makes sense to invest it in real estate beforewatching your money'sworth go down while sitting in your account.
However, there are two things to keep in mind when investing in real estate:
Real estate should only be one component of your investment and retirement mix.
Your real estate investment should fit you, your situation, and your goals.
We'll help you figure things out. If you'reconsidering investing in real estate, you can count on us to make your real estate investment incredibly easy.
