Assumption: Material assets retain their value
A big argument for investing in real estate has always been protection against inflation. That’s why real estate is also referred to as “concrete gold”. Similar to gold, they are intended to protect the capital invested in them from inflation. This is mainly due to the fact that real estate is considered to have stable value and its values even increase. But how much reality is there in this assumption? We first approach this question using the basic concepts on this topic.
What does “inflation” mean?
Inflation basically means nothing more than an increase in prices. However, it is not about the prices for individual goods or services, as these can rise and fall in a market economy. Rather, inflation refers to the increase in the price of goods in general. This means that in reality consumers can buy for one euro less. The money is therefore practically “devalued”.
When does an investment offer protection against inflation?
Whether a capital investment protects against inflation is basically easy to explain. If the increase in value of an investment is above the inflation rate, its increase in value is higher than the loss due to dwindling purchasing power. This means that capital grows even after inflation is adjusted for. In this context, material assets such as real estate are considered particularly safe. In contrast to other investments, such as securities or other short-term investments, the risks of falling values are significantly lower.
Myth or reality? It comes down to five factors
As is so often the case in life, a blanket statement contains myth and reality at the same time. This also applies to the claim that investing in a house or apartment as an investment protects your money from inflation. Because as the lawyer so aptly answers questions: It depends! In this section we will clarify which five factors are important when it comes to real estate as protection against inflation.
1. Period
Probably the most important criterion for assessing whether and to what extent a property can protect against inflation is the period under consideration. The different factors influencing the valuation of an investment with regard to inflation are constantly changing. These factors consist of the inflation rate and the performance of the real estate. In the case of properties used by third parties, there is also the development of rents. Accordingly, the use of the property is also crucial.
2. Inflation rate
In times of inflation, prices increase. This also applies to real estate. Basically, the performance of a property keeps pace with inflation. If the property is also financed, inflation has a double positive effect for property owners. Because the nominal value of the debt remains the same, while in reality the value of the debt decreases due to the devaluation of money.
3. Performance
However, when it comes to the value of a property, the inflation rate is only one of many influencing factors. A property is also subject to the laws of the market. Accordingly, their price is also determined by demand. The location, the supply in the respective region and the condition of the apartment or house have a particular influence on the demand for a particular property. Furthermore, external conditions, such as the development of interest rates on loans, determine whether demand increases or decreases.
4. Self-used
Basically, when it comes to protecting against inflation, it makes a difference whether real estate is used by yourself or by someone else. Anyone who lives in their own home can look forward to a certain level of inflation protection for their capital. As a rule, a property is financed over a long period of time, so that the monthly charges can be planned and only change when the fixed interest rate expires. In addition, the value of a house increases in times of inflation. A tenant, on the other hand, must expect that his rent will rise due to inflation. A tenant does not have any insurance in the area of the property.
5. Used by others
The inflation protection of a property increases even further if it is rented out to a third party as an investment. Owners of a rented apartment not only benefit from the increase in value and the depreciation of debts, but also from rising rents. For example, if a rental agreement includes an index rent, the property owner has the option to adjust the rent in line with inflation. This means that the rent is always increased in line with inflation.
Analysis shows: The myth of real estate as protection against inflation is alive
The analysts at Deutsche Bank Research conducted a study examining the development of real estate prices and the development of inflation. The result: Between 1970 and 2022, increases in real estate prices significantly exceeded inflation in 16 countries, including Germany. Purchase prices increased by more than 400 percent, while inflation only increased by 300 percentage points. This means that real estate in Germany has fundamentally protected capital from inflation over the past 50 years.
Source: Deutsche Bank Research, OECD
Properties over ten or twenty years old are always a good choice
If the time periods are chosen to be smaller, the same picture emerges for all 20-year periods in the countries examined: inflation protection was always provided by real estate. Looking at it over ten years, it was still 36 out of 43 periods. It was only during long phases of high inflation that real estate was unable or only partially able to live up to its reputation. There was such a phase in Germany between 1995 and 2012. This was related to the effects of reunification.
Myth confirmed – but the individual case decides
The statements and results summarized here are fundamentally valid for Germany. However, the extent to which a property protects your capital from inflation depends largely on the individual case. In Germany, too, there have been locations and locations in recent years and decades where property prices have not risen as rapidly as in and around metropolises. The inflation rate, on the other hand, is the same for all locations. Therefore, in individual cases it may happen that houses or apartments have offered little or no protection against inflation.
Challenges and risks when investing in real estate
In order for a real estate investment to offer protection against inflation, a number of factors must be taken into account in the decision. Because there are certainly risks in relation to the topic discussed here. You need a clear strategy to invest correctly. Of course, you can’t change the inflation rate itself. But you can at least partially influence all other factors for the success of your real estate investment, such as interest rates, the location and the condition of a property. Below are some tips and strategies.
Tip 1: Find low interest rates and lock them in for a long period of time
The first important tip: Compare the interest rates carefully before investing. The interest rates vary considerably from bank to bank. There are two options to filter out the best offer for you. First: You can obtain loan offers from banks yourself and compare them. Second: You use independent financial comparisons. DFM Deutsche Finanzmakler AG, the financing partner of the DFK Group, offers such an independent comparison. Regardless of which route you take, once you have found a favorable interest rate, lock it in for as long as possible. You can find an overview and a forecast of interest rate developments here Contribution.
Tip 2: Good location for top performance
In order to achieve a performance that exceeds inflation, the location of the property is crucial. So before you invest in a house or apartment, you should take a close look at the location of your desired property. Here you will find out what you need to consider and what factors play a role in the success of your investment Contribution. In it we have summarized everything you need to know about choosing a location for a property as an investment.
Tip 3: Existing properties in good condition generate excellent values
Basically, new build properties offer the best values in terms of increased value. But existing houses can also be strong investment properties. It depends on the condition. It’s worth taking a closer look here, because it shows that freshly and high-quality renovated houses and apartments usually protect the capital invested very well. On the other hand, there may be a lack of security against inflation when it comes to properties in need of renovation, which primarily have deficiencies in the area of sustainability. The DFK Group recognized this trend early on and only offers highly renovated properties with the highest energy saving standards.
Tip 4: Include rental development
If your desired property is a property as an investment, another factor is the rent. The amount of rent that can be achieved and its future development are crucial for a successful investment. As a rule, the protection factor against inflation increases significantly for a rented apartment. Because rents usually rise with inflation. To ensure that the rents are right, it is important to choose the right property. You can find detailed information about where the best rents can be achieved and how a property works best as an investment here Contribution.
Conclusion: More reality than myth – but it depends
In summary, real estate as a tangible asset is a good way to protect your money from inflation. However, it depends on the individual property whether and to what extent protection against inflation exists. In plain language: If you own a property that is losing value and inflation rises at the same time, your capital will melt away. As a rule, in Germany it is the other way around. This is especially true if the house or apartment is financed through a loan and is also rented to third parties.
Real estate lives up to its reputation – if the investment is well planned
It can be said that protection against inflation through real estate is by no means a myth. At least not if it is a well-planned and solid investment. That’s why it’s important for you to take a close look before investing in a property.
Beat inflation with DFK real estate
We at the DFK Group have decades of experience in the area of real estate as an investment and choose the locations of our properties carefully. The vast majority of our properties are located in designated growth regions with enormous potential for increased value. We look forward to helping you protect your capital from inflation with a strong property. Contact us here and now. Our advice is free and absolutely non-binding.
