Real estate prices have grown at a little faster pace than the inflation rate over the last 55 years, making it traditionally an excellent inflation hedge. Some are questioning if it’s still a smart time to invest in real estate, however, since the increase of house prices is beginning to slow.

Here’s a deeper look at how the shifting real estate market is being impacted by decades-high inflation and whether it makes sense to purchase now or wait.

The effects of inflation on the real estate market

Surges in inflation are not simply noticeable in the grocery shop or the petrol station. Virtually everything’s cost of products and services is affected by high inflation, including real estate and real estate investments. The operational expenses of an investment are impacted by rising prices for things like electricity, water, property taxes, and insurance.

Fortunately, rental growth has outpaced inflation by a wide margin. Investors should thus be able to pay the rising expenses of owning and managing a rental property. Over the last several years, real estate inflation, which is related to the value of the property, has also surpassed the rate of inflation, rising by as much as 19% annually. As a result, real estate is now a superb hedge against inflation.

The pace of price increase is already slowing down, thus the increase in housing prices in the next months may not be sufficient to surpass the 8.5% inflation rate of today. Home prices increased by 10.8% between July 2021 and July 2022, according to the National Association of Realtors, even if prices remained below the record high reached in June 2022. The rate of rental increase is likewise declining month after month.

High inflation also has an influence on interest rates. The Federal Reserve has already increased interest rates five times and has said it will do so again before the year is through. A rising interest rate environment increases the cost of borrowing, which may have an effect on an investment’s bottom line and reduce its profitability.

Not only do higher borrowing rates affect people purchasing investment properties. They also have an effect on real estate investment trusts (REITs), since REITs leverage their holdings heavily with debt.

Is it better to purchase now or wait?

Real estate seems to be still outperforming inflation in terms of prices and rentals, making it a profitable investment at the moment. However, buyers of assets amid a downturn in the property market should think very carefully before doing so. Prices would ultimately rise again, but there’s a possibility that the property’s value and the demand for rental property might temporarily decline. If this happens, the protection against inflation wouldn’t be lessened.

A little decline in inflation in July suggests that investors may soon get some respite. Investors should take advantage of current market possibilities rather than waiting for prices to decline or inflation to revert to more typical levels.

Lots of REITs have seen their share values fall as a result of inflationary pressures and growing interest rate worries. Given their dividend rates and potential for long-term development, many REITs may, when held for five to ten years or more, provide a rate of return that is greater than inflation. With the property market in flux, buying cheap nearly always boosts your prospects of earning more money in the long run. The time to purchase is now.