Why Your Home Can Be a Hedge Against Inflation
Inflation is the sustained upward movement in the overall price of goods and services while the purchasing value of money decreases. Tangible assets like your home consistently become more valuable over time. In inflationary periods, your home is a good investment and a hedge against inflation.
Money in the bank loses purchasing power due to inflation. The interest you may be earning is almost always less than inflation.
Home prices increase during inflation, but so does rent. With mortgage rates near historic lows, the interest is, generally, less than the appreciation the property is enjoying. Combined with the leverage of using borrowed funds to control an asset, your equity often grows at a faster rate than inflation.
As an Example
Let’s take a 90% mortgage at 3.5% for 30-years on a $400,000 home. If that home appreciates at 4% a year, it will have an estimated equity of $220,000 in seven years. This is due to appreciation and amortization. That is a 27.5% annual rate of return on the down payment. That is a significant hedge against a current inflation of 4%.
Put that same $40,000 in a certificate of deposit that earned 2%. After seven years, it would be worth only $45,947. If it was invested in the stock market that earned 7% annually, the $40,000 would grow to $64,231. The equity in the example for the home would be almost 3.5 times larger.
Why a Home is Better than Other Inflation Resistant Investments
Other assets considered to be good bets against inflation include some bonds, gold and other commodities and real estate. Another distinct advantage of investing in a home is that you would be able to live there with your family and enjoy it which is not possible with bonds and commodities.
There are certainly other considerations in a comparison like this such as maintenance. But this could partially offset by the cost of housing being less than you would be paying for comparable rent. And with the shortage of rental units available, the rent will continue to increase annually. However, your other housing costs are fixed (with the exceptions of increases in property taxes and insurance).