At regular intervals various research groups in Germany produce studies asking the question as to how well property holds up as a hedge against inflation. In the current climate such studies are popping up everywhere, and not all lead to the same conclusion.
So how well does property protect against the ravages of inflation, which has been higher now for the last two years than at any time in the last two decades. The researchers at Deutsche Bank have analysed property performance over the last 50 years, and in the light of slightly falling residential property prices in a time of high inflation, ask the question - can the claim still be made that property IS a good hedge against pernicious inflation. Their answer - yes, it does offer protection, but not always, and not everywhere.
With the ECB now having raised rates seven times in succession, including the most recent 25bps rise on Thursday 4th May, one effect is that bonds become more attractive for investors. The current 10-year Bund is now paying out 2.3%, while the higher interest rate makes financing property investment more expensive. With less potential purchasers able to afford a house, or to re-finance their existing borrowing, prices tend to fall. There is more competition to property as an appealing asset class.
But the Deutsche Bank researchers looked at property prices in different countries over the last 50 years, and concluded that, from 1970 to 2022 house prices HAVE outstripped the rate of inflation, and by some margin.
Jochen Möbert, head of research at Deutsche Bank, expects that only in exceptional cases will property actually stagnate or even fall significantly in the long term, even when consumer price inflation is still strong. Property prices will rise, while purchasing power will fall. The current imbalance between demand and supply should continue to exert upward pressure on house prices. But Möbert points to a recent phase - between 1995 and 2012 - when it took 17 years for buyers to get back the price they paid at the earlier date - and until 2017 when inflation is included. That early date marked the end of the post-reunification boom, which was followed by a deep valley and slow recovery. Things went sideways for a long time.
Still, over time, prices should recover despite these odd short-term periods. Between 1970 and 2022 house prices in Germany rose by more than 400% while consumer prices rose by less than 300%, and Möbert writes in his study that it would be a very rare occurrence for property prices not to rise in a period of generally high inflation, such as now.
Much depends on the behaviour of rents, he says. Officially raising rents can be tricky because of tenant protections, but with the current supply bottlenecks, rents are rising strongly nonetheless. The Association of Pfandbrief Banks (VdP) has just issued data showing rents on new lease agreements in Q4 of 2022 rising by 6.5% year on year - a record.
The question of protection against inflation also depends on the property itself, whether it is owner-occupied and what condition it is in. For owner-occupiers, a paid-off property offers protection in old age against rising rents, with only ancillary costs to be covered. As a landlord, rental prices to tenants can be adjusted in line with inflation, but costs also increase, often more so than for owner-occupiers, with the value of the income decreasing in the process.
The condition of the property is also clearly a consideration. Given the heavy costs that all property owners are now being confronted with in line with Germany's hugely challenging energy efficiency targets over the coming years, these elements will be hard to factor in in the overall calculation of value versus inflation. This is likely to tilt the argument in favour of new-built properties over the next few years, in determining a clear long-term winner.
REFIRE: Even then, in our experience, the question is never fully resolved. As a general rule, neither equities, gold, commodities, cryptocurrencies, bonds or even real estate can offer a guarantee of protection against inflation in the short or medium term. In the very long term all forms of investment offer some form of protection in the sense of delivering a yield equal to inflation. But that can be over a long, long time.
For those interested in the results over a VERY long time (355 years) we recommend readers research the study produced by Eichholz and Ambrose in 2012 on a single property on the Herengracht in Amsterdam, for which complete data existed. We've written about it before in REFIRE and talked about it in presentations. It's a fascinating study, and the results may surprise you.