Have you ever wondered why every year the prices of products and services usually increase? This can be explained by the effects of inflation.
Inflation is basically a metric used to measure how much the average price of a set of products and services has increased over a certain period of time. So, basically, its increase represents a reduction in the purchasing power of the consumer.
In other words, because of the way inflation works, $100 today is not the same as $100 ten years ago. This is easy to see when we look at the prices of products in our economy. day by day during those years.
An example would be Disney's own parks, in OrlandoFlorida, where a ticket cost $46 in 2000, and now costs more than $125. Thus, the money that is kept in the bank or under the mattress has its value diminished with each passing year.
When it comes to protecting against inflation, the investments are not evaluated in the same way. Although certain investments may seem promisingThe reality is quite different when inflation is taken into consideration, and what you thought would generate profit may even end up generating a loss.
In this understanding, the chart below compares the CDI (Interbank Deposit Certificate) with the IPCA (National Wide Consumer Price Index) over the period from 1999 to 2017. If you invested in the CDI during that period you had gains above inflation.
However, inflation will often have eroded much of your gains. If we look at the year 2013 for example, the CDI yielded 8.06% and inflation measured by the IPCA was 5.91%. Therefore, your return this year would only have been 2.15%.
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One of the main assets that are considered as great "hedges against inflation are the real estate. In the financial market world the term "hedge" is used to refer to protection, often being an investment that serves to offset potential losses.
An asset is considered an hedge against inflation if it provides some degree of protection against an increase in the general price level of goods and services in an economy over a period of time. This is why invest in real estate is considered a hedge against inflation, since the values of houses and rents usually increase during inflationary periods.
If we look at the USA, we will see how real estate prices have behaved in recent years, compared to inflation, as we will be able to see the effect of the hedge we mentioned above.
The graph below shows a comparison of the valuation of houses in the US (in red) with the inflation rate (in gray) over the period 1965 to 2016. Looking at this graph we can see the protection that investments in US real estate provided during that period.
Over the years, several studies have been made with the objective of really observing the sector's potential real estate as a hedge against inflation. A study by Markus Demary and Michel Voigtländer called "The Inflation Hedging Properties of Real Estate: A Comparison Between Direct Investments And Equity Returns" set out to analyze real estate properties as a hedge against inflation.
They made a analysis regression analysis, where they divided real estate into three types: residential, retail, and office. And with this, they came to the conclusion that a direct investment in residential property is the one that offers the greatest protection against inflation.
They believe the reason for this is because homeowners have power market, and therefore can easily optimize rent payments.
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Besides this, many others studies have already been done to test this hypothesis. For example, the real estate residential and commercial had a performance favorable as inflation protection properties in developed economies such as the US (e.g., in Fama & Schwert, 1977; Peyton, 2011) and in developing economies such as Nigeria (e.g., Bello, 2005, Ogunba Obiyomi & Dugeri, 2013).
Likewise, the sector real estate was seen as a good hedge in Austrialia (Leung, 2010) and Korea (Park & Bangs, 2012).
Besides being a hedge against inflation, the fundamental characteristics of investment real estate include high cash yields and low correlations with stocks and bonds. The main arguments for including real estate include the following: market portfolio, diversification, high yield, performance attractive long-term and potential inflation hedging.
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In all these cases, The Florida Lounge can help you understand the impacts of events like these on the real estate market in Florida! Our relationship agents have expertise in real estate investment for Brazilians in the state of Florida and can accompany the entire process of purchasing your dream home, assisting with visa issues, bank account, remittance of values and much more.