How Real Estate Can Hedge Your Startup Against Inflation

Inflation has reached a 40 year high in 2022. It has caused the costs of our everyday needs to shoot up as well.  Inflation is usually determined by the Consumer Price Index (CPI). This measures the average change over time in the prices paid by consumers for goods and services.  Prices have jumped at the grocery store as well as to the gas pumps. The cost of energy rose almost 30% and shelter costs increased 3.8%.  Is there anything you can do to stay ahead of inflation?  Let’s learn more about real estate and inflation below.

Real estate has traditionally helped investors fight against rising prices. This is due to property values rising with inflation, which causes rental income to rise while mortgage rates remain fixed.  However, the negative impact of inflation on prospective homeowners is evident. Every region in the U.S. continues to face an underbuilding gap.  The housing unit gap has actually increased to 5.5 million in the past 20 years. This jumped to a 6.8 million housing unit gap when considering losses of current units.  In terms of the seller’s market, 6.46 million homes were sold in November 2021. Sales in 2020 and 2021 were the highest since 2006 with the Case Shiller U.S. Home Price Index showing a 18.6% annual gain.

Pandemic and Supply Chain Issues

The COVID-19 pandemic is considered to be one of the major factors contributing to the inflation due to supply chain issues.  The pandemic saw global shutdowns in production that led to the lowest national housing inventory in April 2021.  Before the pandemic, home inventories provided 5.5 months of sales and car inventories delivered two months of sales. They were only able to supply 4.4 months of home sales and one month of car sales in June 2021.

The housing/real estate industry is also seeing the price of construction material rise as supplies run low.  Building materials typically impact anywhere from 35% to 60% of overall construction costs, so when the cost of the materials increase, construction projects become expensive tasks.  It doesn’t help that tariffs, quotas on steel and aluminum, and failed attempts at renewing the softwood lumber agreement with Canada further exacerbate the situation while the shortage of skilled workers continues to increase labor costs. 

The concerns conjured by the pandemic are causing the public to spend more on goods rather than services, which is further encouraged by federal stimulus checks.  By September 2021, consumer spending on goods increased by 21.7%.  These issues related to ill-balanced supply and demand have resulted in today’s serious inflation.

Inflation will continue to affect us in the near future in several ways. The Federal Reserve System will most likely raise interest rates in the next two years, but if pandemic impacts are able to decline, demand for goods versus services will hopefully balance, easing pressure on supply chains as production slowly recovers.  Housing inflation will still be prevalent as lumber prices and building costs are expected to remain relatively high.

Where is the Housing Market Going?

The 2022 housing market is currently riddled with uncertainty. Inflation, supply chain issues, and demand are predicted to contribute to a 6.6% increase in home sales and a 2.9% increase in appreciation but at the cost of decreasing inventory of available homes and increasing interest rates. However, real estate investments are a potential hedge to inflation. For example, commercial real estate (CRE) is a possible long term investment as a 1% increase in inflation is associated with a 1.1% return in private CRE investment while real estate investment trusts (REITs) can finance income-producing real estate.

Metaverse is now offering real estate investments as well that are driven by scarcity.  Metaverse is even expected to grow at a compound annual growth rate of 43.3% through 2027.  With so much potential amidst economic volatility, could real estate be your inflation hedge?