According to Pete Wargent, co-founder of BuyersBuyers, when the value of a currency is expected to fall, investors turn to inflation hedging to protect their investments from inflationary climates.
“Silver is not a happy place when it devalues so quickly. So gold, precious metals, farmland, residential land and real estate are all asset classes where investors will look grow their capital later this year,” said Wargent.
The co-founder made the statement following the pandemic and government stimulus programs that have seen households rack up $250 billion in savings over the past two years.
Looking at historical data, Wargent noted a period in the mid-1970s when inflation peaked at 17.5% and property prices spiked in major capitals.
“The median price of a house in Sydney has risen from $18,700 to $68,850 over the decade, an increase of more than 250%, while real unit prices in the port city have exploded, registering a nominal increase of over 300%,” he said.
He added that over the same decade the median house price in Melbourne had soared by more than 200%, showing that property prices are well ahead of the rapid rise in prices in the consumption.
The economic environment is different today, Wargent acknowledged, as interest rates are much lower than they were in the 1970s. But he still reiterated anticipated investor action: “We expect to see real estate investors looking for effective hedging as the headline inflation rate potentially pushes towards 5-6% later this year.”
BuyersBuyers managing director Doron Peleg agreed with Mr Wargent and noted possible double-digit rent increases and yields of at least 4% in 2022, making this class of investment attractive to investors. .
Despite rising fixed mortgage rates, Peleg touted other financing options.
“Major institutions have been busy cutting their variable mortgage rates to 2% in March so far, while many lenders are still offering variable mortgage rates below 2% for eligible borrowers,” Peleg said.
While the two experts highlighted the benefits of real estate as a cost-effective option to hedge against inflation, they also warned buyers to keep buffers when buying property.
“Borrowers should always consider whether they can afford repayments later if interest rates were to rise significantly. We will see negative real interest rates for now, but this dynamic clearly won’t last forever. Mr. Wargent warned.
“Overall, this year’s election promises appear to be much more supportive of housing demand, at a time when there is a chronic shortage of rental housing. Investors will naturally seek an inflation hedge in such an environment.
Real estate is a type of real property that refers to any land and its permanent improvement or accompanying structures, whether natural or man-made.