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If You Fear Inflation, Should You Buy Real Estate?


Analysis of three separate data time series: National Median Home Price, Dow Jones Industrial Average, and Consumer Price Index (a measure of inflation).

It often gets thrown around that owning real estate is a good "hedge" against inflation. That is, real estate prices will inherently rise under inflationary pressures. As far as conventional wisdom goes, this seems to be the case. But does this relationship actually hold true? To investigate this idea further, we looked at three separate data time series: National Median Home Price, Dow Jones Industrial Average (DJIA), and Consumer Price Index (CPI, a measure of inflation).

(See Also: Is it Better to Rent or Buy a Home?)

As you can see in the graph below (all lines are expressed as the percent change starting from January 1963), home prices have consistently outpaced inflation by a wide margin. Even the recent real estate market meltdown hasn't brought prices back down to inflationary levels. By contrast, the stock market had been growing at below inflation levels until the early '90s when it exploded, even surpassing home price growth.

Home Prices, Stocks, and Inflation Since 1963

As you can see, during the heavy inflationary periods of the early and late '70s, real estate did indeed provide an excellent hedge against inflation. Home prices essentially kept pace or outpaced CPI growth during these periods while the stock market stagnated. From a basic perspective, therefore, a dollar would have been smartly invested in real estate during this time.

Early '90s Inflation

Late '70s Inflation

Interestingly, looking at a more recent time period, the late '80s, real estate again outpaced inflation (much more modest inflation this time compared to the '70s). However, over the time period shown here (1986-91), the stock market more than outpaced home price growth at almost all times (the exception being the '87 market crash). So in this case, in hindsight, a dollar would have been more smartly invested in the stock market than in real estate.

Late '80s Inflation

To conclude, historically speaking, real estate investment has been a good inflation hedge, particularly during periods of high inflation when other market growth stagnates. Of course, this is a vast over-simplification of the picture, as evidenced by the stock market growth of the late 1980s. Furthermore, individual real estate markets can behave wildly different from national trends. It is also important to note that on smaller time scales, fluctuations in both inflation and home price trends do not correlate exactly, meaning that inflation is not as significant a price driver for real estate than some might have you believe.

In general however, it is safe to say that real estate values are not likely to be pushed down in any material way by inflationary pressures. As diversity is the key to any long-term success in investment, real estate has to be included in any portfolio.

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