Is Real Estate A Good Hedge Against Inflation?

It often gets thrown around that owning real estate is a good “hedge” against inflation. That is, real estate prices will inherently rise under inflationary pressures. As far as conventional wisdom goes, this seems to be the case. But does this relationship actually hold true? To investigate this idea further, we looked at three separate data time series: National Median Home Price, Dow Jones Industrial Average (DJIA), and Consumer Price Index (CPI, a measure of inflation).

As you can see in the graph below (all lines are expressed as the percent change starting from January 1963), home prices have consistently outpaced inflation by a wide margin. Even the recent real estate market meltdown hasn’t brought prices back down to inflationary levels. By contrast, the stock market had been growing at below inflation levels until the early ’90s when it exploded, even surpassing home price growth.

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