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

[Handle123]

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

There are so many "what ifs". Buying $40k of Gold in 1980, so could stick it in a drawer and 35 years later it is no worse having and have possible gained few hundred per oz. A house one bought at $40k and didn't rent it out or repair is most likely a jungle around and in it, but you still had property taxes at very least of 55k? If you bought land on edge of major city, could be worth millions with no or little damage and minimal taxes. If you bought a farm, possible tax credits for not farming it. And with $40k house, put down 10%, rented out, it is paid off even after several refinancing mortgages and now house is worth $110k and paying full income taxes on rent as fully depreciated.

Think it is apples and oranges, where you buy it is huge, gold does not pay interest and had to pay for whole thing, dollar cost averaging might work better. Real Estate is better wealth building than gold for most people, but that wasn't the question. Very good topic though, makes you think of possibilities.

 

[GloriaBrown]

• 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.

This is not really true if you look at the long term chart, as I mentioned earlier gold increase % in long term = real estate increase % + rent increase %.

 

[OTM-Options]

• 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.

This is not really true if you look at the long term chart, as I mentioned earlier gold increase % in long term = real estate increase % + rent increase %.

IMO ...... Charts are very deceiving, you pick out patterns that you want to see and past results are no indication of future results.


Real Estate vs Gold for inflation hedge/investment:

• A: Gold or Gold on margin.
• B: Real Estate with a mortgage and possible rental income.

I would pick B.

 

[Maverick74]

Something to keep in mind. For around a 100 years or so before QE, real estate provided no net real return. It wasn't until the monetary base exploded that we see this upward curvature in real estate prices. Is that sustainable? I don't know. It's never worked before but who knows, maybe it's "different this time". Just keep in mind the last 25 years or so really skews the data. Same is true for Bonds fwiw.

 

[Daal]

Something to keep in mind. For around a 100 years or so before QE, real estate provided no net real return. It wasn't until the monetary base exploded that we see this upward curvature in real estate prices. Is that sustainable? I don't know. It's never worked before but who knows, maybe it's "different this time". Just keep in mind the last 25 years or so really skews the data. Same is true for Bonds fwiw.

I wouldn't say 'it has never worked before'. There is a 26 sample size of countries that lifted their economies out of the depression through currency debasement in the 30's. If you take a look at the data its pretty darn hard to rationalize that it was something else that got these economies out of the depression. Usually, through getting out of the gold standard/devaluations/capital controls or a combination of them. Money base expansion (but more importantly, M2 increases along with velocity) is the fiat version of that. It has worked pretty darn well to lift the US from having another depression in 2009. One can cry all the long about the 'tail risks of hyperinflation' but yet, preventing an almost certain terrible scenario (a deflationary depression) is worth it even if it carries the tail risks of hyperinflation

 

[Maverick74]

I wouldn't say 'it has never worked before'. There is a 26 sample size of countries that lifted their economies out of the depression through currency debasement in the 30's. If you take a look at the data its pretty darn hard to rationalize that it was something else that got these economies out of the depression. Usually, through getting out of the gold standard/devaluations/capital controls or a combination of them. Money base expansion (but more importantly, M2 increases along with velocity) is the fiat version of that. It has worked pretty darn well to lift the US from having another depression in 2009. One can cry all the long about the 'tail risks of hyperinflation' but yet, preventing an almost certain terrible scenario (a deflationary depression) is worth it even if it carries the tail risks of hyperinflation

There is a big difference from using expansionary monetary policy to get out of a recession and QE. QE has taken a completely different approach by systemically removing risk from the markets in an effort to get the pilot light lit so to speak. This has NEVER been done before and Keynes himself was adamantly against this. And QE did not get us out of anything. It did exactly what the models said it would, it inflated risk assets since the risk premium was gone it meant that all risk assets suddenly became deeply undervalued. It distorted the true cost of money creating malinvestment. And it deeply distorted investment away from labor into capital thereby creating cheap jobs in it's wake and giving business all the incentive to invest in paper assets vs people. The result, no middle class, a wealth income gap the world has never seen before and a market so deeply leveraged on the perception that risk is no where to be seen. We exchanged one bubble for another.

What got us out of the rut in the 1930's was WWII. It allowed the government to use "fiscal expansionary" policies to promote and sustain the war effort which got our factories back to 100% production and the country back to full employment. It had nothing to do with monetary policy. In fact, it is accepted by most economists that Hoover's blunder in the 30's was actually cutting fiscal spending at the height of the depression when the country needed it the most.

 

[Daal]

What got us out of the rut in the 1930's was WWII.

I don't think that is supported by the data. Not if you use a resonable definition of 'getting out of the depression'. The sign of the economic rate of change, changed, in those 26 countries right after they devalued/got off gold/debased. So improvements kept accumulating till WWII (and the improvements were significant, it wasn't just a technical thing), where the rate of change improved further but what stopped the downward spiral and made things actually stop collapsing whas the monetary policy many years before

 

[Maverick74]

I don't think that is supported by the data. Not if you use a resonable definition of 'getting out of the depression'. The sign of the economic rate of change, changed, in those 26 countries right after they devalued/got off gold/debased. So improvements kept accumulating till WWII (and the improvements were significant, it wasn't just a technical thing), where the rate of change improved further but what stopped the downward spiral and made things actually stop collapsing whas the monetary policy many years before

Daal, the Gold standard absolutely destroyed those countries that were on it. Getting off the Gold standard DID help them. But that is separate from US policy. Daal monetary policy did not end the depression. You can read this paper.

"This paper is about the size of fiscal multipliers and the sources of recovery from the Great Depression. Its baseline result is that 89.1 percent of the 1939:Q1-1941:Q4 recovery can be attributed to fiscal policy innovations."

http://www.nber.org/papers/w16380

It's from the National Bureau of Economic Research.

The National Bureau of Economic Research (NBER) is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community." The NBER is well known for providing start and end dates for recessions in the United States.

The NBER is the largest economics research organization in the United States. Many of the American winners of the Nobel Memorial Prize in Economic Sciences were NBER Research Associates. Many of the Chairmen of the Council of Economic Advisers have also been NBER Research Associates, including the former NBER President and Harvard Professor, Martin Feldstein.

The NBER's current President and CEO is Professor James M. Poterba of MIT.

 

[Maverick74]

http://www.history.com/topics/great-depression

"By 1933, when the Great Depression reached its nadir, some 13 to 15 million Americans were unemployed and nearly half of the country’s banks had failed. Though the relief and reform measures put into place by President Franklin D. Roosevelt helped lessen the worst effects of the Great Depression in the 1930s, the economy would not fully turn around until after 1939, when World War II kicked American industry into high gear."

 

[GloriaBrown]

IMO ...... Charts are very deceiving, you pick out patterns that you want to see and past results are no indication of future results.


Real Estate vs Gold for inflation hedge/investment:

• A: Gold or Gold on margin.
• B: Real Estate with a mortgage and possible rental income.

I would pick B.

I compared long term historical data but not just pick one part I want. You really subjectively pick what you want without any data.