Article published 15 November 2021
If you’re looking at making new investments, you might be worried about inflation rising before you make your move. If inflation rises before you’re ready to buy, your savings won't get you as far - but there are ways to protect against this.
How can inflation affect your assets?
The concept of inflation is used to understand the general increase in the level of prices of goods and services. Inflation can have a direct effect on your savings as over time you will be unable to buy the same value of goods and services you can currently buy with the same amount of money.
In general, assets and investments that have or generate income that can appreciate over time will be less affected by inflation. If you hold other types of assets or investments with a set annual return, the impact of inflation can negatively affect the performance as your return will hold less value each year.
How to protect against inflation?
Whilst inflation can decrease the performance of some financial assets, there are ways you can protect yourself against inflation through hedging. Put simply, hedging against inflation means strategically taking steps and choosing investments that will protect the value of your assets from the effects of inflation.
It’s important to protect your assets against inflation to ensure your investments hold their value and are not depreciating or providing a loss in the long term.
Ideally, when choosing a hedge against inflation you would look to make stable investments in assets that can either maintain their value during inflation or have the potential to increase in value over time. Another strategy to hedge against inflation can include investing in assets with value that is strongly correlated with inflation.
Is real estate a good investment to hedge against inflation?
Yes, real estate is an example of a good investment to hedge against inflation, as it is a type of asset that can increase its value over time and provide long term returns on your investment. For this reason and many other benefits, real estate has commonly been used by property investors and homeowners as an effective hedge against inflation.
For all homeowners, owning property can be a useful hedge against inflation, due to its effect on debt. As your homes’ value is likely to rise over time, your loan-to-value ratio (LVR) will naturally decrease giving you the benefit of additional equity. Additionally, you can take further actions to protect your assets against inflation, such as fixing your home loan whilst interest rates are low. Choosing a fixed rate home loan while interest rates are low, will ensure that your interest rate and home loan repayments are not affected by inflation or other changes in the market for a set period of time.
If you live in the property you own, your property protects your wealth against inflation as you are no longer subjected to rising rent prices and changes in the rental market. Alternatively, for property investors, you are able to benefit from the rising costs of rent as you will earn rental income on your investment property.
Of course, it is important to understand that while property prices will generally rise with inflation, there are still costs and risks associated with purchasing real estate. If you’re looking at buying your first home or investing in property, speak to your Mortgage Choice broker to get a better understanding of your situation and help find the right loan for you.