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

[Maverick74]

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.

You have to read everything before you respond. I NEVER stated Gold was a better investment. In fact, I stated the exact opposite of your supposition. I said Gold was a better insurance policy then real estate and all the data backs that up. You know who owns Gold? Central banks. THAT is where the money is.

 

[eurusdzn]

Real estate is a highly levered investment.
Owning physical gold is not.
This has got to be considered, right?

 

[Maverick74]

Real estate is a highly levered investment.
Owning physical gold is not.
This has got to be considered, right?

Yes. Most of the housing indices that measure return on home prices use notional value. But for a given individual their "perception" is often skewed by the fact they are levered to the hilt. Also it should be pointed out we don't have "one" real estate market. Real estate in Malibu and Manhattan is not the same market as Columbus, Ohio.

 

[Daal]

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.

I agree with all of this. The thing is, a point can be made that gold is expensive insurance beause giving up a few percentage points a year in order to bet or hedge that there will be hyperinflation seems quite pricey. Gold might do a better job (price wise) during a hyperinflation but real estate ain't so bad either. It will do a good job at protecting you from hyperinflation, my parents did just fine because they own their property and Brazil (where I live) had a hyperinflation a few decades ago. The house kept up with inflation and even outperformed it by a lot when the economy started to do well in the 2000's

I'd say that during a hyperinflation its more likely the government will outlaw gold than they will outlaw property because so many people own homes. In fact, Argentina banned gold buying in 2012. I wouldn't be surprised to know that it happend in Zimbabwe a few years and Yugoslavia in the 90's. So a point can be made that you might be forced to sell (and pay tax) or to illegally have to hide it when the government comes after that gold. We know they will have a hard time doing that with RE

I'm not saying gold has no place in a portfolio, I just happen to think that if you are going to have, for instance, 30% of a portfolio dedicated to inflation protection, most of that should go to RE and a smaller percentage to gold

 

[Maverick74]

I agree with all of this. The thing is, a point can be made that gold is expensive insurance beause giving up a few percentage points a year in order to bet or hedge that there will be hyperinflation seems quite pricey. Gold might do a better job (price wise) during a hyperinflation but real estate ain't so bad either. It will do a good job at protecting you from hyperinflation, my parents did just fine because they own their property and Brazil (where I live) had a hyperinflation a few decades ago. The house kept up with inflation and even outperformed it by a lot when the economy started to do well in the 2000's

I'd say that during a hyperinflation its more likely the government will outlaw gold than they will outlaw property because so many people own homes. In fact, Argentina banned gold buying in 2012. I wouldn't be surprised to know that it happend in Zimbabwe a few years and Yugoslavia in the 90's. So a point can be made that you might be forced to sell (and pay tax) or to illegally have to hide it when the government comes after that gold. We know they will have a hard time doing that with RE

I'm not saying gold has no place in a portfolio, I just happen to think that if you are going to have, for instance, 30% of a portfolio dedicated to inflation protection, most of that should go to RE and a smaller percentage to gold

The suggested allocation towards Gold I hear the most is in the 2% to 5% range, definitely not 30%. Here is an outstanding article that goes through all the possible investment classes and how they fared in Germany between 1920 and 1923. It brought up many issues I didn't even think about. I highly suggest everyone read through it before commenting. It's a good read and explains the economics of what really unfolded and why.

http://www.usagold.com/germannightmare.html

 

[fhl]

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.

You're right about the difference in number of people getting rich from re vs gold. But as someone else said, that's because the re investor borrowed most of the money.

 

[GloriaBrown]

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.

I agree but mainly because people basically use mortgage with house so it is leverage. If people buy gold ETF with margin can have similar result, who wins depend on who catches the main raise in long term.

 

[OTM-Options]

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.

You're right about the difference in number of people getting rich from re vs gold. But as someone else said, that's because the re investor borrowed most of the money.

I agree but mainly because people basically use mortgage with house so it is leverage. If people buy gold ETF with margin can have similar result, who wins depend on who catches the main raise in long term.

• Mortgage = Good debt most of the time.
  
• Real Estate = Possible rental income to help pay for mortgage.
  
• Margin on gold = Very risky.
• Gold = No rental income.

 

[Daal]

The suggested allocation towards Gold I hear the most is in the 2% to 5% range, definitely not 30%. Here is an outstanding article that goes through all the possible investment classes and how they fared in Germany between 1920 and 1923. It brought up many issues I didn't even think about. I highly suggest everyone read through it before commenting. It's a good read and explains the economics of what really unfolded and why.

http://www.usagold.com/germannightmare.html

Gold ownership was banned in Austria in WW1 (at least according to an article I read), the article doesn't say it but I'd assume it also happened in Germany. So the way you could have it was by having gold outside the country, which is likely to create the cost of storage. But if you are going to have assets outside your country, there might be an even better solution

The article states that "those who held real estate throughout managed to save the capital thus invested." also it states that "Those who held funds in dollars, pounds or other stable currencies, or in gold, saved their capital."

"Getting down to specifics, we can say that those who bought a well-diversified list of stocks in solid, well-established companies quite early in the inflation and who held on throughout the period and also through the stabilization crisis saved much or all of their capital"

So an even better solution to gold is either real estate or stocks in a foreign currency. That way you get the best of both worlds (hyperinflation protection AND a productive asset that earns a risk premia). One can go even further in protection by owning, for instance, a globally diversified portfolio of stocks (along with REITs and rental properties) that way you are protected multiple times by owning several different currencies (which helps with FX vol) in assets that tend to hold up during hyperinflation (which is only likely to happen in one country out of the dozens that you own the assets)

Overall, it just seems a better return producing solution than having gold

 

[Maverick74]

Gold ownership was banned in Austria in WW1 (at least according to an article I read), the article doesn't say it but I'd assume it also happened in Germany. So the way you could have it was by having gold outside the country, which is likely to create the cost of storage. But if you are going to have assets outside your country, there might be an even better solution

The article states that "those who held real estate throughout managed to save the capital thus invested." also it states that "Those who held funds in dollars, pounds or other stable currencies, or in gold, saved their capital."

"Getting down to specifics, we can say that those who bought a well-diversified list of stocks in solid, well-established companies quite early in the inflation and who held on throughout the period and also through the stabilization crisis saved much or all of their capital"

So an even better solution to gold is either real estate or stocks in a foreign currency. That way you get the best of both worlds (hyperinflation protection AND a productive asset that earns a risk premia). One can go even further in protection by owning, for instance, a globally diversified portfolio of stocks (along with REITs and rental properties) that way you are protected multiple times by owning several different currencies (which helps with FX vol) in assets that tend to hold up during hyperinflation (which is only likely to happen in one country out of the dozens that you own the assets)

Overall, it just seems a better return producing solution than having gold

Holding other currencies is definitely a smart move. We can take that further and say if one buys Gold, they can borrow Yen to buy Gold. Gold is not even that far off the highs in terms of Yen. In fact, it's widely recommended that one does just that. The article mentioned though that while those who held all the way through did fine in both stocks and real estate, during the actual inflation real estate prices actually fell in real dollars and substantially. It's very easy to monday morning quarterback this stuff and talk about remaining calm in the face of panic. How many people actually did that in 2008? Hell, you could make the argument for riding the tech bubble in 2000 from 5000 down to 1000 and had you waited that out, we did just recently take out the highs. But do you really think people can and will do that?

Again the issue here I guess comes down to what is it that one is trying to accomplish. Do you want investment returns? Do you want to capitalize on the event? Do you want to hedge or protect your assets? Do you want to speculate?

I personally like the liquidity and flexibility of FX and I hate the lack of liquidity of real estate. I do like real estate ETFs. They seem like a decent compromise. What was interesting about the article is the different phases of the hyperinflation cycle and how at different times in the cycle there were a different set of winners and losers. I didn't realize just how much speculation was taking place during that time period. The other interesting part was how the German gov't put a freeze on rents. BTW, we did that here in the US too so don't think that was just the crazy Germans. We still have rent control in NY and San Francisco.