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Housing: no shelter from inflation

Investors should not expect house prices to benefit if consumer prices accelerate
Housing: no shelter from inflation

Does housing protect us from inflation? This is the question posed by fears that it is about to rise significantly; a team of economists led by the University of Buckingham’s Tim Congdon recently warned that it could exceed 5 per cent in the next few years.

The answer is: probably not.

Which might surprise you. Bricks and mortar are physical assets which should hold up well when the value of money falls. What’s more, some of the things that cause consumer price inflation should push up house prices, such as easy credit, consumers’ optimism about their future incomes, or a tight labour market and rising wages. And, indeed, a belief in property as a hedge against inflation can be self-fulfilling; if enough people share the belief, fears of inflation will indeed raise demand for houses and hence their prices.

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