This is how I plan to play inflation.
So inflation is on the prowl and it’s coming for your money.
If you’ve got cash stuffed under your mattress, it’s currently losing value at a pace of about 5% a year.
That’s not great.
But what are you going to do? Is there a hedge against inflation? Where can you put your money so it’s safe?
There’s no one answer to this, but one answer I know is: property.
I’m aware at this point I sound like a broken record. Property is a great way to build wealth. Property is a great way to generate cashflow. Property is a great way to hedge inflation.
And as boring as I know I must sound, it’s true.
Property works as an inflation hedge.
In fact, some analysts like SQMs Louis Christopher reckon that as inflation accelerates, that could actually drive demand for property:
Rising inflation could temper the declines to some extent as higher inflation tended to lift dwelling values.
“There is a chance here with accelerating inflation that investors and home buyers will flock to property to get a hedge against inflation,” he said.
“If we were to see a pick-up in real wage growth commensurate with inflation, similar to what we had in the 1970s, that will likely stop a hard landing in the housing market.”
The central idea here is that when everything is devaluing, then you want your money to be in something ‘real’.
That’s why a lot of people say commodities (like gold, but also iron ore) are a good hedge against inflation.
But I’m not about to go out and buy a freighter full of iron ore, am I?
No, real things will hold their relative value as the value of money falls.
I mean, think about what happened in Germany during the hyper-inflation that followed WWI.
In 1922, in the German Weimar Republic, a loaf of bread cost 160 marks. By 1923, that same loaf of bread would cost you 200,000,000,000 (200 billion) marks.
That’s some very serious inflation.
But think about it. Imagine in 1922 you bought a house for 48 million marks (about 300,000 times the price of a loaf of bread. Hey, let’s say you bought a really nice house for 100 million marks.
What can you do?
Well, you can wait a year, bake a loaf of bread, sell it for 200 billion marks, and completely clear your debts.
You just traded a loaf of bread for a house.
And so this is the thing. There are losers but there are also winners with inflation.
And people who hold property, and people who hold property with debt, so long as their incomes are rising, can do very well by holding property through inflationary periods.
And so yeah, do I expect high inflation to drive property demand higher?
Yes. Yes I do.
It does for me. I’ll be rotating out of cash and into property if inflation looks like getting too much more of a run on, you can be sure of that.