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How your property is a good hedge against inflation

Updated: Mar 6, 2023

What kind of investment is secure and has strong inflation hedging potential?

The answer is property investment.

Did you know that property investment, also known as real estate, is considered to be a better investment option than stocks and bonds?

This is because, in addition to meeting the need for housing, real estate investing will cause an increase in the cost of building new houses, which will raise the prices of existing houses. With the emergence of inflation just as the economy was beginning to recover from the pandemic, more Malaysians were researching buy house in Malaysia procedure and learning how to buy a house in Malaysia, while turning to the housing market as a more appealing investment option, serving as a good alternative to the more volatile stock market.

When compared to more traditional sources of income return, real estate is also appealing. Real estate can improve an investor's risk-return profile by providing competitive risk-adjusted returns. In general, the real estate market has low volatility, particularly when compared to equities and bonds.

In this article, you will learn

how property investment can fight against inflation and why you should invest in the Malaysian property market.

How could this form of investment combat inflation?

An inflation hedge usually entails investing in an asset that is expected to hold or increase in value over a set period of time. It is also an investment that is able to protect a currency's purchasing power from a loss of value due to rising prices, either macroeconomically or due to inflation. Alternatively, the hedge could entail taking a larger position in assets, which may lose value more slowly than the currency.

The ability of real estate to hedge inflation stems from the positive relationship between GDP growth and demand for real estate. As economies grow, the demand for real estate rises, resulting in higher rents and higher capital values. As a result, real estate tends to maintain capital purchasing power by passing some inflationary pressure on tenants and incorporating some inflationary pressure in the form of capital appreciation.

Given that house prices tend to rise in lockstep with inflation, and that higher economic growth encourages consumption, which leads to an increase in asset prices, a synchronised movement between inflation and the returns on property investment should indicate good hedging capacity. In fact, for the past three decades, there has been a co-movement between the Malaysian House Price Index and the Consumer Price Index (CPI), with both indices appearing to rise indefinitely.

Home prices typically rise in lockstep with inflation. This is because the costs of homebuilders rise with inflation. Existing homes, on the other hand, rise with inflation. If you have a fixed-rate mortgage, your fixed monthly payments become more affordable as inflation rises. Furthermore, as a landlord, you can raise the rent to keep up with inflation.

Inflation is not expected to have a negative impact on real estate returns. Even if it does not provide a complete hedge against inflation, a move in line with inflation could still make it a valuable asset, given that real estate investment is capable of keeping up with inflation in the long run., while also being able to respond quickly in the short run when there is a change in the market.

Most importantly, despite challenges faced by the housing market in recent years, such as the global economic downturn that began in early 2018 due to US-China trade tensions, and the COVID-19 pandemic in early 2020, the Malaysian House Price Index (with a CAGR- Compound Annual Growth Rate of 7.2 percent) has greatly outpaced the growth of the CPI (with a CAGR of 1.85 percent). This means that homeownership can be an effective inflation hedge even during inflation, as seen in 2020, when investors could still profit from housing investment returns despite a drop in CPI. So, invest property against inflation.

Why invest in Malaysian property?

  1. You can earn passive income in the form of rent. This income can be used to pay off your mortgage, lowering or eliminating the cost of financing your real estate investments. Rental income is also leverageable, which means that bankers recognise it as a legitimate source of income that will be considered when making future loans versus inflation.

  2. You get tax advantages. While you must declare rental income on your tax return, the amount includes deductible expenses such as mortgage interest, fire insurance premiums, quit rent and assessment, and others. So, if you are a young property investor who finances 90% of your property with a mortgage and follows the right procedure to buy a house in Malaysia, you will most likely record a small rental loss from the investment property and will not have to pay any taxes.

  3. Future capital appreciation. Let’s say you purchase a property from Seri Pajam Development. This property appreciates at a rate of 2% per year from its current market value of RM400,000. By year 10, it would be worth RM487,798 or RM610 per square foot. Meanwhile, you would reduce your outstanding mortgage balance to RM261,945. Thus, by year 10, your property equity or net worth would be RM225,653. This only applies to properties priced at or below the median price of comparable properties in a good township. If, for example, you purchased a property in Bandar A at RM1,000 psf, you would most likely see a price drop after 10 years because the median price would not have increased to RM1,000 psf during that time.

When it comes to investing for the future, taking into account the effects of inflation on your assets can assist you in mitigating inflation before it depletes the purchasing power in your retirement accounts. Inflation works well with real estate. You can hedge your bets against inflation and protect your retirement funds over time by investing in income-generating real estate from Seri Pajam Development. This is due to the fact that as inflation rises, so do property values and the amount a landlord can charge for rent. For example, real estate income is earned by renting out a property. As a result, the landlord will earn a higher rental income over time. This aids in keeping up with the rise in inflation. Therefore, real estate income is one of the best ways to protect your investment portfolio from inflation.

Now is the best time to invest in the real estate market, particularly in Malaysia. Click this link to find your dream property and begin your property investment in Malaysia.


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