Can Your Real Estate Investment Hedge Against Inflation?

There’s been a 2.5% to 3.5% uptick in inflation rates this year. Simultaneously, bank loan rates are closing in on HDB’s 2.6% rate. Thus, how do you leverage a home investment to tide against these rising numbers? 

According to the Monetary Authority of Singapore’s half-year macroeconomic review, Singapore’s core inflation indicates an upward trend in the next few months, potentially peaking in Q3 2022. In fact, core inflation is projected to exceed its previous forecast range, reaching between 2.5% to 3.5%.

Consumer prices in Singapore have spiked as well due to supply chain disruptions, restrictive domestic labour market conditions, and higher commodity prices. Unfortunately, consumer prices are expected to rise further and stay elevated for a certain time. No wonder our wallets seem lighter lately! 

You’re probably thinking about ways to hedge against rising inflation. SingSaver uncovers real estate inflation hedge with a home investment to cope with rising mortgage rates.

How can a real estate inflation hedge work for you?

Inflation drives property prices to increase

Due to the rising cost of raw materials, property prices will increase. Real estate and rental income commonly keep up with inflation over time, and investors usually outperform the market during inflation. 

Inflation also drives rent to increase

It goes without saying that as property prices increase, so does rent. Hence, renting out your property at a higher cost could ease your monthly repayments and your property’s upkeep. In fact, if your rental charges surpass inflation, you could even generate passive income.

Your mortgage will cost less over time

If you buy property at a fixed-rate, it would be based on the property value at the time of purchase. If you’re renting a home, you’re subject to the increase of property prices, but paying a fixed-interest mortgage will eventually be cheaper during the fixed period as inflation continues. 

It can ease inflation’s effects on your retirement funds

In years’ time, your retirement funds wouldn’t be worth as much as it does today (thanks, inflation). Thus, your purchasing power would suffer. Having an income-generating property could help hedge against inflations’ effects on these funds. 

New launches’ bid and breakeven prices will be wider

Due to the rise of labour cost and raw materials, the breakeven/launch price and the bidding price of new launches will consequently have a wider gap.

Real estate commonly appreciates long-term

Property prices in Singapore are predicted to keep climbing. Residential properties almost always appreciate over time due to population increase, land demand, infrastructure developments, among other reasons. This is why some people see a real estate inflation hedge as a way to cushion against inflation. 

What type of property investment should I look for during inflation? 

Properties with a short-term lease

Short-term leases can frequently reset rent to market rates as compared to long-term property leases which could miss out on the inflations’ benefits on property income. 

Properties that can pass price increase to their customers/tenants

Investing in residential properties or any property that can directly pass the increase of prices to its tenants usually does well during inflationary periods. On the other hand, investing in, say, a commercial space in a mall, would not benefit you as much if shop owners decide to close. 

In-demand properties in prime locations

You need tenants to generate income, especially on a short-term lease. In-demand properties in prime locations usually don’t lack interested tenants. Therefore, it’s important to consider the location and resilience of your property. 

It’s always useful to look out for the following: 

• Where upcoming MRT stations are being located
• Future projects within an area
• The government’s infrastructure plans

Is now the right time to enter the home investment market?

Thanks to inflation, aspiring homeowners must now pump more funds for mortgage payments as some banks have increased their fixed-interest rates. 

However, once you purchase a home on a fixed-rate, it wouldn’t suffer the effects of inflation during the fixed-period. As mentioned above, this could be beneficial for you as you would be paying for its value at the time of purchase as inflation drags on. 

Besides, you could always explore other mortgage loans with stable fixed-interest rates. 

Additionally, data.gov.sg has shown a clear indication that the private property market is growing, hitting 53.6% from 2010 to 2020 alone. As this figure covers a range of properties, you can expect to see appreciation in home investment value.

The property market grew even through the pandemic, spurring the government to announce more property cooling measures such as higher Additional Buyer’s Stamp Duty (ABSD) rates, stricter Total Debt Servicing Ratio (TDSR) ceilings, and a drop in the Loan-to-Value (LTV) limit for home loans from the Housing Development Board (HDB).

These actions are necessary because otherwise, there’s risk of a destabilising correction in the long run. A borrower could expect interest rates to further rise in a couple of years.

That said, as a buyer, you benefit with home investments now as many condo developments offer an early bird discount, which rolls into additional gains for you.

Overall, it’s usually safe to invest in real estate despite inflation. What’s important is to strategically choose the right income-generating property, and be financially secure enough to commit to this long-term investment. Then, you could benefit from rental or capital value growth, strengthening your purchasing power until your retirement years.

If you’re interested to learn more about real estate investing, read this article on REITs VS Commercial Real Estate In Singapore: Which One Is A Better Investment?

Convinced to make that home investment? Compare and find the best home loan for you!

Read these next: 
Guide To Property Investment In Singapore
How To Buy A House In Singapore: A Complete Guide (2022)
Best REITs In Singapore 2022 For Your Investment Portfolio
9 Ways to Hedge Against Inflation with Investing