February 16th, 2023 | Buying
Does Real Estate Protect You Against Inflation?
Aside from the emotional reasons to purchase a home, namely the concept of having a safe and secure shelter for your family to flourish, real estate is also well-regarded as an investment strategy. For most people, buying a home is the single biggest transaction of their lifetime. Your home is likely your largest asset, and for many individuals, owning a home is the ultimate indicator of financial health.
So let’s look at real estate through a financial lens, as an investment. How does it stack up against other investments, and can real estate protect you against inflation?
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First of All, What is Inflation?
If you’ve been paying attention to the news lately, you’ve likely read all about how the rate of inflation is at its highest rate since 1981. Slashed interest rates during the pandemic resulted in more Canadians borrowing money, which caused our economy to overheat.
But what exactly is inflation? Simply speaking, inflation is the rate at which the price of goods and services go up over a period of time. Typically, we look at inflation on a year-over-year basis, and the inflation rate has a direct impact on markets, the economy, and the cost of living.
Is Inflation Bad?
Inflation is neither good nor bad. However, when it gets too high, it could impact the cost of living in a negative way. In general, some inflation typically indicates a healthy economy with plentiful jobs and high wages. In fact, The Bank of Canada has a “target” inflation rate of 2%.
Are you curious about the financial aspect of buying a home in Ottawa? Read these blogs next:
- The Hidden Costs of Buying and Selling Real Estate in Ottawa
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- Can You Buy a Home with a Co-Signer?
How Does Inflation Impact Different Types of Investments?
Whether or not your investment is negatively impacted by inflation depends on the type of investment you’re talking about. There are a few types of investments including:
Fixed Income – These investments include things like bonds and GICs. They provide a fixed return on investment after a certain period of time. While these investments are not tied to the stock market and are therefore considered less risky, fixed-income investments are heavily impacted by inflation since the interest rates generated are typically much lower than the rate of inflation. The difference becomes even greater if inflation goes up.
Equity – An equity investment is when you purchase shares of a company. These investments are traded on the stock market and are typically considered to be more high-risk than other “safer” investments. While some inflation could be good for the stock market (remember, moderate inflation is the sign of a healthy economy!) in some cases, too much inflation could cause some stocks to suffer, and require investors to make higher returns to get a positive return on their investments.
Property – These investments are just what they sound like. Tangible assets like real estate are typically considered a “hedge” for inflation. This is because historically, property values tend to appreciate faster than the inflation rate.
Please note, these highlights are for general illustrative purposes only. If you’re looking for investment advice, we recommend working with a financial planner.
For Example
According to the Bank of Canada inflation calculator, $100 worth of goods and/or services in 2010 would cost the same at $130.30 in 2022. The annual rate of inflation at that time was 2.23%. That’s about a 30% increase over 12 years.
Now, let’s look at average home prices in Ottawa.
In 2010, the average price of a residential home in Ottawa was $326,590. In 2022, the average price was $691,528. That’s about a 112% increase in 12 years.
Buying a home might just be your biggest ever investment. Learn everything you can before making any decisions. Read these blogs next:
- Fixed-Rate Vs. Variable Rate: Which Mortgage is Right For You
- Is Now a Good Time to Invest in Ottawa Real Estate?
- Know Your Real Estate History and Succeed in the Ottawa Market
Things to Consider About Real Estate and Inflation
Although the figures above might paint a pretty clear picture that real estate will likely appreciate faster than inflation, it’s important to note that too much inflation is not great for anyone, even real estate investors.
Here are some of the things you should consider:
- When inflation rises, so do interest rates. Higher interest rates mean greater borrowing costs and higher mortgage payments.
- Additionally, rising inflation has an impact on almost everything. When inflation is high you will notice increased grocery bills, higher utility bills, more expensive fuel, and more.
- Any equity-building renovations you are planning for your home will also cost more. Construction costs go up.
Investing in Real Estate is a Long Term Strategy
In the grand scheme of things, buying a property is more than just a simple investment. It’s your home. No matter what, you need a place to live, and it’s always better to pay a mortgage than to pay rent. As a homeowner, you are simultaneously building equity as you pay off your mortgage and as property values increase.
However, investing in real estate is not a “get rich quick” strategy. It’s a long game that requires patience. That’s another reason why it’s such a good idea to get into the market as soon as you can. Consider the position of the person who purchased a home in 2010 and experienced 112% growth in their investment in those 12 years.