As investors face high inflation and interest rates, finding ways to protect their portfolios from erosion of value is essential. Real estate has long been considered a potential solution, and a recent study sheds light on the long-term relationship between house prices and rents as an inflation hedge for long-term investors.
Long-term relationship between house prices and rents
The study, published in The Journal of Urban Economics in 2015 by John Y. Campbell and João F. Cocco, analyzed data from the US market from 1950 to 2012. It found a strong relationship between house prices and rents over the long term. As rents increased, house prices tended to follow suit, although other factors such as interest rates, income growth, and demographic changes can also impact house prices.
Track rental yields for future house prices
To use real estate effectively as an inflation hedge, investors must track rental yields to get a sense of the direction of future house prices. This means that investors should consider investing in regions and properties where rental yields are expected to rise over the long term.
Diversification is key
Investing in different regions and property types can help capture variations in the strength of the relationship between house prices and rents. It can also help hedge against regional or property-specific factors that may impact the long-term relationship between the two variables.
Consider interest rates, income growth, and demographic changes
The study found that changes in interest rates and income growth can impact the relationship between house prices and rents. In times of high interest rates, investors may want to consider fixed-rate mortgages or adjustable-rate mortgages with caps to mitigate the risk of rising interest rates. Demographic changes can also play a role, and investors should remain aware of these trends to adjust their real estate investments accordingly.
Conclusion
Overall, the study provides valuable insights for investors looking to use real estate as an inflation hedge. By tracking rental yields, diversifying real estate investments, and remaining mindful of interest rates, income growth, and demographic changes, investors can position themselves for long-term growth and protect their portfolios from the negative effects of inflation. Real estate remains a strong hedge against inflation, but it is essential for investors to stay vigilant and adapt to changing market conditions.