Immobilien als Inflationsschutz

What is inflation and how does it affect real estate?

Finally, it's happening—the inflation rate is falling again after months of waiting. The ECB is lowering the key interest rate, as reported by CNBC. But what exactly does this mean, and how can one protect themselves against inflation with real estate?

The time has finally come, inflation is falling again after months of waiting and the ECB is lowering its key interest rate. But what exactly does this mean, and how can you protect yourself against inflation with real estate? In this article, you’ll learn everything you need to know about real estate as a hedge against inflation and how the ROC token can help you.

An entire generation has experienced something unpleasant over the past two years: they have been, and continue to be, confronted with real, consumer-felt currency devaluation. Especially those who grew up with currencies like the Schilling, Deutsche Mark, or Guilder are realizing for the first time that monetary stability is not a given. Older generations, of course, can remember at least one inflation surge in the mid-1990s.

Inflation—what exactly is it?

The Latin word inflare (to inflate) is the origin of the economic term inflation, one of the most frequently discussed concepts in economics. In the field, there is consensus only on the fundamental definition: inflation is the rise in the price level of an economy.

The colloquial use of the word inflation differs from its scientific meaning. People talk about inflation when goods or services become more expensive. For example, after a poor apple harvest, apples become more expensive, and following a good harvest the next year, they become cheaper again. Price fluctuations of this kind do not fall under the scientific concept of inflation. They are an expression of a basic market principle: supply and demand are regulated by price.

Imported price increases

German-speaking countries are closely linked to the global economy, so it is only natural that price increases for imported goods are reflected in the inflation rate. This is most noticeable in the energy sector. The most important type of crude oil for Europe, Brent, cost around $41 per barrel in 2021, $86 in October 2022, over $120 after the start of the Ukraine war, and currently about $80.

These price spikes are reflected in inflation rates. Fuels for vehicles and heating oil are important items in every consumer price index. It’s important to note that price jumps upwards can occur quite suddenly, whereas the gradual decline in price levels happens very slowly due to various technical reasons.

The Deutsche Mark, and with it the Austrian Schilling, were icons of monetary stability for over 50 years. External economic influences, which have always existed, were offset by regular currency revaluations. This method is not available to the European Central Bank due to the weakness of the majority of economies that make up the Euro.

The Forms of Inflation

If, for example, food prices rise, it primarily affects consumers. A consumer price increases. Anyone measuring inflation through consumer prices will observe a price increase. Even a price increase due to normal market activity, such as seasonal price changes, amplifies inflation.

Inflation is defined by a rise in the general price level, and there are different methods for measuring it. In the Eurozone, the European Central Bank (ECB) uses the Harmonized Index of Consumer Prices (HICP), which is calculated based on the complex consumption habits of all member countries. Additionally, there are other semi-official data, focused on individual economies and/or their economic sectors.

The variety of indices complicates the discussion even for professional observers. However, it can generally be said that lower-income households experience a higher inflation rate than what is officially reported, and they are justified in feeling this way. The consumer basket used to track consumer price developments is based on average incomes, which inevitably exceed lower incomes.

Asset price inflation

One form of inflation does not immediately affect everyone, yet it is widely noticed—though not always recognized as such: asset price inflation.

The prices of real estate, stocks, gold, and other assets are not included in the consumer price index. Instead, there are separate indices for these, and the term inflation is often consciously avoided, being replaced with the positive term “appreciation”.

Since these indices are calculated separately, there can be divergent trends between consumer prices and asset values.

Before inflation surged in the consumer sector, there had already been years of asset price increases, well above official inflation rates and GDP growth. This was driven by the central bank’s zero-interest policy. While the consumer sector benefited from low capital costs, there was also a tremendous increase in demand for tangible assets, as financial investments yielded no returns.

The Money Supply

Anyone examining the origin of the word inflation arrives at the question: what is being inflated? The answer is: the money supply.

The term money supply is complex and, broadly defined, refers to the total of all circulating coins, banknotes, and bank deposits (also known as book money) and similar claims. The central bank is responsible for measuring this.

The traditional approach to explaining inflation is that it arises when the money supply increases, or when the velocity of money circulation rises. Combined with the inverse scenario—where the money supply does not increase, but the production of goods or the volume of trade and services declines—this forms the basis of the quantity theory of money.

It is clear that pure quantity theory alone cannot fully explain inflation, as market dynamics and external economic factors also play a significant role.

However, particularly in the Eurozone, the impact of monetary policy should not be underestimated. The zero-interest policy undermined the banks’ business model. Banks traditionally operate on the margin, the difference between the costs of deposits and the earnings from loans. When this no longer worked, and to avoid widespread bank collapses, central banks provided banks with allocations (such as TLTRO), which significantly increased the money supply.

Inflation in the Eurozone became noticeable and visible in 2021, well before the doubling of oil prices and the Ukraine war. Everyone is free to form their own opinion on the causes.

Real Estate and Inflation

In German-speaking countries, memories of periods of inflation have largely faded. However, the collective memory holds that real estate has historically withstood currency devaluations.

Real estate is also subject to the market principles of supply and demand. However, currency devaluation—whatever the cause—significantly erodes an economy’s strength over time, which in turn dampens demand for goods, services, and naturally, real estate.

The foundation of a healthy real estate market is robust purchasing power, which drives steady demand. Real estate prices can also decline, but the dynamics differ from those of consumer goods or financial assets like stocks or gold.

The Divided Real Estate Market

Owner-occupied properties and investment properties must be considered separately.

For determining the price of owner-occupied real estate, various factors come into play. Beyond tangible criteria like size, building quality, age, and condition, individual preferences, and of course, location, play a significant role.

In Vienna, prices per square meter for condominiums currently range from around 5,000 euros to over 18,000 euros.

Investment properties are evaluated based on entirely different criteria. A property can be considered an investment as long as it yields returns. An attractive purchase price allows for a favorable return. Investment properties can be significantly improved through various measures, including potential renovations or optimizing usage options, thus enabling better rental terms and higher income.

Rocksolid Estate AG is planning to build a real estate portfolio accessible to investors with as little as 100 euros per share. To minimize risk, the property portfolio is diversified. Investments are not only spread across typical investment property types such as residential and commercial buildings but also include alternative energy sources like photovoltaic systems and assets from the vacation hotel and logistics sectors.

The selected investment properties promise not only an attractive current return but also positive future appreciation that can offset or even surpass currency devaluation.

Anyone examining the origin of the word inflation arrives at the question: what is being inflated? The answer is: the money supply.

The term money supply is complex and, broadly defined, refers to the total of all circulating coins, banknotes, and bank deposits (also known as book money) and similar claims. The central bank is responsible for measuring this.

The traditional approach to explaining inflation is that it arises when the money supply increases, or when the velocity of money circulation rises. Together with the inverse scenario—where the money supply does not increase, but the production of goods or the volume of trade and services declines—this forms the basis of the quantity theory of money.

It is clear that the pure quantity theory alone cannot fully explain inflation, as market dynamics and external economic factors also play a significant role.

However, particularly in the Eurozone, the impact of monetary policy should not be underestimated. The zero-interest policy undermined the banks’ business model. Banks traditionally operate on the margin, the difference between the costs of deposits and the earnings from loans. When this no longer worked, and to avoid widespread bank collapses, central banks provided banks with allocations (such as TLTRO), which significantly increased the money supply.

Inflation in the Eurozone became noticeable and visible in 2021, well before the doubling of oil prices and the Ukraine war. Everyone is free to form their own opinion on the causes.

Rocksolid Estate AG

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