Comments on: Is Real Estate a Good Hedge Against Hyperinflation?

By: Mike

Mike — Wed, 11 Nov 2009 22:32:28 +0000

I disagree. In an environment where the rate of inflation is increasing, there are winners and losers. The winners are those who borrowed money and the losers are those who lent the money. Say you had 10k in cash which needed to be put into an inflation hedge of some sort.

Say that in the year 2015, you make 60k a year, and have 20k you need to invest in. You purchase a house for 300k using that 20k as a down payment. Inflation is non-existant and you get a fixed rate loan at 5 percent. You have invested the equivalent of 1/3 of a year salary. Fast forward to the year 2020. High levels of inflation have taken hold and things cost 6 times as much as before. You now make 360k a year and your house is now valued at 1.8 million. At this point in time, you would have a bit more than 1.6 million in equity in the house. Your 20k you invested 5 years ago, representing a third of a years salary, has grown to 4.4 times your yearly salary!!! If you had put that money into Gold, you would still only have a third of a years salary.

So, where did that extra money come from? Well, the massive losers in an inflationary environment are the people who loan money at too low of an interest rate. There is an invisible transfer of wealth from the lenders to the borrowers.

So, if you think that inflation will take off, best get into real estate and watch as the fool and his money is parted.

By: you-in-dc

you-in-dc — Tue, 05 May 2009 15:15:02 +0000

You forgot a couple further tests of the hedge: what future demand will look like, useful of the product, and transaction cost. Gold fails or rates low in these categories!. These are harder to determine but can have a huge impact on the hedge as well. For example: Oil is a physical commodity generally purchased with cash (although you could argue the speculative nature of it). The current demand is sort of week, but in the mid term the supply of oil is likely to go down and the demand to go back up (making it a better hedge in the face of inflation). The question you have to determine about Gold is whether it is going to have a higher or lower demand in the future. Much of this is tied in with usefulness.

What is Gold used for? Looking nice, expensive jewelry, and some electronic manufacturing. Silver on the other hand is used in many more industrial applications giving it higher intrinsic value then Gold whos value is tied up more with perception.

The other test is in transaction costs. Everyone knows homes and cars have high transaction costs (costs related to selling or buying the item) that detract from their value as a hedge. What most people don’t realize is that gold, silver, and many other commodities can have very high transaction costs unless you have direct access to the material which you usually don’t. Gold can have 10-15% cost difference between wholesale and retail, making it much less valuable as a hedge.

So i don’t disagree with the overall points, but you must consider more then is listed here. Gold gets touted a lot as a safe haven in inflation. Sometimes it is, sometimes it isn’t. My advice is to stick with things that people will always need, and try to lower the transaction costs as much as you can.

By: Benjamin Vander Jagt

Benjamin Vander Jagt — Tue, 03 Feb 2009 14:47:28 +0000

For those who have sold their houses before the real estate bubble had burst, would purchasing real estate during the current adjusted market be a different story? For instance, houses can now be bought in my area for around $50k that were $200k just one year ago.

Additionally, assuming that the federal government will -not- be able to control its spending and borrowing, and assuming hyperinflation in the next year or two, would it not be a better idea to buy using a fixed-rate mortgage loan and pay the minimum payments? I understand that doing that is part of why there is an economic crisis, but would it be tactically smart to do? Then, assuming one does have a lot of extra cash, couldn’t that person buy gold, even though he’s sitting on a mortgage loan?

Thank you for your well written article, Dr. Petrov!

By: Real Estate Newbie Info » Blog Archive » Is Real Estate a Good Hedge Against Hyperinflation?

Mon, 22 Dec 2008 17:19:07 +0000

[...] unknown wrote an interesting post today onIs Real Estate a Good Hedge Against Hyperinflation?Here’s a quick excerptLeveraged real estate is a poor hedge, especially as the upcoming hyperinflation takes its toll on the real estate market. [...]

By: Safe Real Estate Info » Blog Archive » Is Real Estate a Good Hedge Against Hyperinflation?

Sat, 20 Dec 2008 05:59:22 +0000

[...] unknown wrote an interesting post today onIs Real Estate a Good Hedge Against Hyperinflation?Here’s a quick excerptIn general, real assets hedge better than paper assets. By definition, real assets have a value of their own. Inflation does not erode their value. Thus, any real asset can be an inflation hedge. It follows that real estate is also a … [...]