How Real Estate Acts As A Hedge Against Inflation

How Real Estate Acts As A Hedge Against Inflation

Let’s begin with what’s going on in our country in today’s time. Rupee devaluation has hit an all-time high. Consequently, the US dollar is equivalent to PKR 200.62- highest recorded!

A frightening situation is going on all over the country due to the immense price hike. Keeping up with rising prices is difficult for earning individuals as it is most probable that their income will not increase with the pace of prices.

With political and economic instability, rupee devaluation has become an inevitable issue over the past few months. According to the global Political Stability Index 2020, Pakistan ranks 184 out of 194 countries, with an average score of -1.85 – almost hitting the rock bottom of the scale.

As a consequence of the political and economic situation in the country, Pakistan’s market is suffering immensely. Investors in foreign countries are also refraining from investing in a market that is beyond volatile.

Real Estate- A Hedge Against Inflation

Investments are a serious issue when it comes to the devaluation of the Rupee. The uncertainty and risks involved in investments cause hesitation amongst all potential investors.

In contrast to other investment options, real estate may be one of the best options to boost income as inflation rises. Stocks and mutual funds may seem like a good investment, but at a time of economic instability, real estate will come to your rescue.

Agency21 International will be highlighting some significant reasons why you should be investing in real estate, but first, let’s learn a few things about inflation and how it decreases the purchasing power of the masses.

What Is Inflation?

Inflation is the persistent increase in the general price level of an economy. In simpler words- for example: What you could buy in PKR 50 a few months ago, now you will have to purchase it in PKR 100. 

Statistics indicate that the dollar was PKR 185 at the beginning of May, however, it has increased by PKR 15 within weeks- now standing at PKR 200.62.

Why Is The Price Of Dollar Increasing?

With the decrease in foreign reserves due to the socio-economic problems in Pakistan, the Rupee has greatly devalued. The devaluation of the Rupee has led to an increase in the dollar price. In this case, the rupee is depreciating whereas the dollar is appreciating. Currently, in Pakistan, inflation has reached an all-time high. As you will read on, we will explain the causes of inflation in Pakistan.

What Causes Inflation?

As mentioned before, rupee devaluation is one of the primary reasons for the increase in inflation. 

Another reason for this major price hike is the turmoil caused by the pandemic that hit the world in 2020. Due to the increased demand for commodities, the overall prices have increased.

The increase in inflation has also occurred due to the increase in manufacturing costs of commodities and increased oil prices all over the world.

Specifically in Pakistan, the disturbances in economic policies i.e. fiscal and monetary policies as well as the political turmoil have contributed greatly to the factors causing inflation. The policies regarding imports and exports have hindered the progress of the balance of payments in Pakistan. 

The country is reliant on imported fuel and essential goods, causing inflation to rise. As a result of increasing fuel prices, the cost of goods and services will be affected. In this way, the purchasing power of individuals will decrease. As an example, what people were buying for PKR 100 a year ago, now they will be buying it for PKR 250.

All in all, the inflation rate has increased from 12.7% to 13.4% since March 2022, according to the Pakistan Bureau of Statistics.

What Exactly Does Inflation Hedging Do?

An inflation hedge is an investment designed to safeguard a currency’s purchasing power against a loss of value caused by rising prices due to inflation or other macroeconomic factors.

In simple words, inflation hedging can save you from incurring future losses due to rising prices. If you have invested in any share for a high return on investment, inflation can hurdle your profitability. For this reason, investors look to invest in safer options that will not depreciate the value of their investments.

In Pakistan, it can be seen that people make several investments including-

• Real estate
• Residential plots
• Bank saving accounts
• Gold
• Stocks
• Agricultural land
• Government bonds

It is safe to say that all except real estate are affected by inflation. It is evident from previous records that with the increasing rate of inflation in Pakistan, real estate value has only increased.

How Real Estate Hedges Against Inflation

The real estate market in Pakistan is estimated to be around $300 billion to $400 billion. According to the Pakistan Bureau of Statistics, the construction output contributes to 2% of GDP, with housing accounting for less than half of that.

According to the World Bank, real estate assets account for 60%to 70% of the country’s total wealth. This is why growth in the respective sector is essential to the economy’s well-being. 

Real estate experts say that real estate is one of the safest options to invest in. Why? It’s because no matter the volatile situation in the economy, real estate investments will be unaffected and the prices will not fall low due to inflation. Undoubtedly, real estate is an investment asset to hedge against inflation in these difficult times.

To safeguard against inflation, people choose to invest in properties and plots to earn profit in the long run. It is important to know that real estate investment is a long-term strategy to hedge against inflation. For example, if you invest in a property today, you will receive a higher return on investment in a few years time. 

Real estate investments can also help you generate passive income. If you purchase a property and rent it out, you will be able to receive a continuous source of income from tenants. This will not only act as a hedge against inflation but will also enable you to profit in times of inflation! During periods of rising inflation, the higher rental income boosts the property value as well.

The Bottom Line

Real Estate Investment is a useful tactic to hedge against inflation while still reaping the long-term benefits of real estate ownership. Pakistan’s economy is facing a major downturn, thus real estate is no less than a saviour when it comes to investing in assets.

Inflation leads to decreased purchasing power, higher interest rates (high borrowing cost), the lowered standard of living, and unprofitable savings. However, one should consider investing in profitable assets like real estate, stocks, and gold.

If you are planning on investing your retirement savings, real estate is definitely a good way to go about the decision. It will not only secure your investments but will also help you profit in the long run. The price of the property only increases with inflation.

Real estate is undoubtedly the safest investment option in Pakistan where prices have now reached a record high. You can contact real estate agencies to plan your investments in residential plots or much more. 

For more information on real estate, you can visit our blog.