Have all those who purchased an apartment, house, or land made a wise decision? Is real estate a hedge against inflation? the inflation raising its head again, investors are re-evaluating their investment decisions. People who had taken floating interest loans are paying conversion fees and getting into the fixed option. People who had locked their money into bank accounts are looking at it again. So, have all those who purchased an apartment, house, or land made a wise decision? Is real estate a hedge against inflation? For an investment to be immune to inflation it is essential that the returns increase by leaps and bounds to keep ahead of it. For many, a house may be the only major asset. They may not have the resources to venture into the arena of stocks, funds, and other alternative investment avenues. So, is this emotionally binding, invaluable asset safe from inflation?

Beating inflation Consider a scenario where there is plenty of money floating around. Coupled with it, a shortage of real goods. Thus arises inflation that brings down the real value or purchasing power of money. Quite contrary to this phenomenon is deflation. In a deflationary economy, there is too little money around and plenty of real goods. By owning assets that rise in value with inflation, in other words real estate, you can beat inflation. Holding liquid cash erodes it during inflation. Reasonably high inflation also showers favours on borrowers. If you owe money to others you will be repaying it at a later point with rupees that is lesser in real value. Thus, it is detrimental to those who have loaned money out for long periods of time. Over the years, the value of real estate in Baroda has appreciated considerably. The increase has always maintained an upward trend. Real estate is a traditional hedge against inflation.

Real estate and price fluctuations During inflation there is a lot of money in circulation. It follows from the definition of inflation that more money trails behind relatively fewer real goods. Consequently, real estate prices in residential areas will increase in proportion to the increased cash flows. Rents are also seen to leap up in cities. Consider a deflationary economy. Here, less money trails behind tons of real goods. As a result of shortage in money supply, the price of real goods comes down. At times real estate prices can beat both inflation and deflation. Perhaps much depends on where this piece of land is located. If you are living in a place where people are moving out due to scarcity of jobs, prices will come down as both population and purchasing power dwindles. On the contrary, if you are living in a place that sees a high influx of people in quest of jobs, you will see a boom in real estate prices. The bottom line - gone are the days when you purchased gold with the excess money you made. It's time to turn to real estate.

As Article Published on 5th May 2005