Is Real Estate a much superior inflation hedge compared to gold?

[Daal]

According to Robert Shiller the long-term real return of real estate is 0%. Pretty similar to gold. It wont follow inflation closely every year but over longer periods, it should be fine. The thing is, with real estate you can collect rents and usually adjust those rents for inflation. So RE is like gold but with an extra yield (usually around 2-6% after expenses in the US)
Furthermore, when most of a country is a homeowner, good luck confiscating that asset or prohibiting its ownership, you get decimated in the next election. With gold, its not so hard to do that. They did it in the 30's

These factors makes real estate a much better inflation hedge than gold

 

[countercountertrend]

pretty sure houses are positively correlated with inflation. Lower interest rates = more borrowing = greater money supply and inflation. People buy houses when the interest is low.

 

[redbox]

According to Robert Shiller the long-term real return of real estate is 0%. Pretty similar to gold. It wont follow inflation closely every year but over longer periods, it should be fine. The thing is, with real estate you can collect rents and usually adjust those rents for inflation. So RE is like gold but with an extra yield (usually around 2-6% after expenses in the US)
Furthermore, when most of a country is a homeowner, good luck confiscating that asset or prohibiting its ownership, you get decimated in the next election. With gold, its not so hard to do that. They did it in the 30's

These factors makes real estate a much better inflation hedge than gold

Governments will come after you with taxation.
http://www.telegraph.co.uk/finance/...ve-ways-landlords-can-beat-new-tax-hikes.html

 

[Maverick74]

According to Robert Shiller the long-term real return of real estate is 0%. Pretty similar to gold. It wont follow inflation closely every year but over longer periods, it should be fine. The thing is, with real estate you can collect rents and usually adjust those rents for inflation. So RE is like gold but with an extra yield (usually around 2-6% after expenses in the US)
Furthermore, when most of a country is a homeowner, good luck confiscating that asset or prohibiting its ownership, you get decimated in the next election. With gold, its not so hard to do that. They did it in the 30's

These factors makes real estate a much better inflation hedge than gold

Daal, this is a very complicated topic. There is no blanket answer. Mathematically speaking, the answer depends on where your cost basis is. I've seen very compelling data refuting what you stated. But only when prices line up. For example, if you were to buy Gold today at it's current price (near the lows) and buy real estate today (near the highs) I think Gold would far outperform real estate. However, that would not be the case in 2009 with the opposite. Prices matter. Over time you can make generalizations as to correlation and long term returns. But we don't live in the generalization world. These assets have to be purchased in both time AND price.

As the other poster mentioned, if real estate did take off under inflation, you can expect your property taxes to go up substantially. There is no such tax in gold. Not saying our clever congress wouldn't create one. Also, rent has an elasticity. At the lower end of the spectrum, market demand is relatively inelastic. If rents were to skyrocket, you would see government subsidies also skyrocket and that would allow a substitution effect among the poor and lower middle class. The wealthy would already own, the upper middle class would already own so that leaves with a very small market in the middle in which to extract economic rent. The reality is always much different then what it looks like on paper.

Now having said all that, there is a valid case made for farmland being a good hedge. But.......farm land prices are VERY high. So once again, if one's cost basis is today's current price, I'm not sure even farm land will generate protection. In the end, prices DO matter.

 

[Daal]

Daal, this is a very complicated topic. There is no blanket answer. Mathematically speaking, the answer depends on where your cost basis is. I've seen very compelling data refuting what you stated. But only when prices line up. For example, if you were to buy Gold today at it's current price (near the lows) and buy real estate today (near the highs) I think Gold would far outperform real estate. However, that would not be the case in 2009 with the opposite. Prices matter. Over time you can make generalizations as to correlation and long term returns. But we don't live in the generalization world. These assets have to be purchased in both time AND price.

As the other poster mentioned, if real estate did take off under inflation, you can expect your property taxes to go up substantially. There is no such tax in gold. Not saying our clever congress wouldn't create one. Also, rent has an elasticity. At the lower end of the spectrum, market demand is relatively inelastic. If rents were to skyrocket, you would see government subsidies also skyrocket and that would allow a substitution effect among the poor and lower middle class. The wealthy would already own, the upper middle class would already own so that leaves with a very small market in the middle in which to extract economic rent. The reality is always much different then what it looks like on paper.

Now having said all that, there is a valid case made for farmland being a good hedge. But.......farm land prices are VERY high. So once again, if one's cost basis is today's current price, I'm not sure even farm land will generate protection. In the end, prices DO matter.

I agree with this. A bad buy is a bad buy. The thing is, even if the government would come cracking down on real estate, you would STILL be getting paid something (but, lets say 2-3% a year instead of 5%). That is still better than gold that would pay 0%.

Lets say you take the rent yield (after-tax) and put in a account that returns something like 5%(stock/bonds mix). Then one day the government really messes up with RE investors by hiking taxes or doing something else. I'd say that the accumulated cash in that account (along with the probability that the government will not significantly change the tax on RE) is more than enough to compensate you. Meanwhile with gold you accumulated zero, all it did was to match inflation (over really long periods). Compounded over a lifetime that yield can exponetially grow, heck, if it compounds enough, it can even make up for the fact that you bought the property at premium price. With gold, you got nothing to compensate you. If you pay too much, you are screwed. With RE, the rent compounded can help you catch up with other investments

 

[Maverick74]

I agree with this. A bad buy is a bad buy. The thing is, even if the government would come cracking down on real estate, you would STILL be getting paid something (but, lets say 2-3% a year instead of 5%). That is still better than gold that would pay 0%.

Lets say you take the rent yield (after-tax) and put in a account that returns something like 5%(stock/bonds mix). Then one day the government really messes up with RE investors by hiking taxes or doing something else. I'd say that the accumulated cash in that account (along with the probability that the government will not significantly change the tax on RE) is more than enough to compensate you. Meanwhile with gold you accumulated zero, all it did was to match inflation (over really long periods). Compounded over a lifetime that yield can exponetially grow, heck, if it compounds enough, it can even make up for the fact that you bought the property at premium price. With gold, you got nothing to compensate you. If you pay too much, you are screwed. With RE, the rent compounded can help you catch up with other investments

Daal, the data does not support this. We have data on what actual yields in real estate "were" and what those returns were over time. We also have the data on Gold. But let me try to be as specific in my argument as possible. Gold does not trade "with" inflation. It trades "ahead" of inflation. You can't buy Gold when hyper inflation or high inflation shows up just like you can't buy a stock "after" a blowout earnings report without paying up for it. Gold is bought BEFORE you get inflation. It's the "expectation" that leads to the rise in price. So if inflation goes up 5% let's say,the price of Gold will not simply go up 5% but rather 50% or 100%. There is convexity at play here and this must be understood. It's also understood that over time real estate provides a yield and Gold does not, the market accounts for this by "discounting" the price of gold in the same way that bonds trade at a discount to par to account for the interest rate changes.

It also must be understood that under a high inflationary environment, the liquidity in real estate will be very low. Your home might triple in price but you will have no way to capture this value. Gold on the other hand will be easy to lock in price. So liquidity is another factor. Now if the argument you are making is that over time under "normal inflationary" conditions which will perform better, most likely that will be real estate assuming a decent cost basis for the reasons you mentioned, in capturing the yield that real estate spits out. Nobody owns Gold for the steady yearly returns. Gold, unlike housing is a form of insurance. You "expect" to lose money year after year but if hyper inflation comes, it will save you as it always has for 2000 years and yes we have the data on this going all the way back to Babylon. So let me sum up my argument this way. Real estate is a better "investment". Gold is a better "insurance" policy. In the game of rock, paper, scissors....insurance always beats investment in a panic. That is it's economic purpose.

 

[xandman]

Real estate is a major input of production.

This guarantees a long term positive rate of return. I would add that it deserves a higher real return than financial assets. Surely, a landlord thinks so.

 

[GloriaBrown]

I backtest before, gold value vs real estate price+rent, the result is these two are very similar in long term.

According to Robert Shiller the long-term real return of real estate is 0%. Pretty similar to gold. It wont follow inflation closely every year but over longer periods, it should be fine. The thing is, with real estate you can collect rents and usually adjust those rents for inflation. So RE is like gold but with an extra yield (usually around 2-6% after expenses in the US)
Furthermore, when most of a country is a homeowner, good luck confiscating that asset or prohibiting its ownership, you get decimated in the next election. With gold, its not so hard to do that. They did it in the 30's

These factors makes real estate a much better inflation hedge than gold

 

[piezoe]

gold is more popular when the price of gold is high, and the price of real estate is low. Real estate is more popular when the price of real estate is high, and the price of of gold is low.

 

[OTM-Options]

....... if real estate did take off under inflation, you can expect your property taxes to go up substantially .......

Not necessarily .......... property taxes factor in all the property values in the area. If the average house goes from $100,000 to $500,000 it's doubtful that property taxes will go up.

IMO ...... Real estate is much better than gold. How many wealthy gold investors are there? Not many. How many wealthy Real estate investors are there? Lots.