Opinion – Grain in Grain: Do property prices rise with inflation?

You’ve probably heard that the price of real estate goes up with inflation. It is common knowledge that real estate is a type of investment that protects against inflation. But is the claim that real estate prices rise with inflation true? And would real estate funds also have the same characteristic?

The first table below shows the annual return on residential property prices calculated by the FipeZap portal.

There is little relationship between property price returns and the IPCA in the last 10 years. In fact, the correlation between the two is 0.17. A high correlation would be if this number was closer to 1.

The variation of house prices in the last 10 years was even below the IPCA.

Therefore, it is not possible to say that real estate prices are adjusted for inflation in the short or medium term, that is, in less than 10 years.

However, in the long term, that is, in more than 10 years, property prices are expected to appreciate at least in line with inflation.

There are two reasons for this. The first is that the materials for building a new property and the labor used for the construction tend to rise with inflation. In fact, in the last 10 years the National Construction Cost Index (INCC) rose more than the IPCA.

As these items necessary for the construction of a new home rise, it is expected that at some point this will be reflected in the price of the property.

The second factor that suggests that real estate should correct for inflation over the long term is the fact that rent is corrected for inflation rates.

Thus, properties in aggregate should not be expected to correct inflation in the short or medium term, but this should undoubtedly occur in the long term.

In fact, when we include more years in the table above, we see that the cumulative return on property prices catches up with the lag observed in the last 10 years.

You may find that the property you purchased has increased in value. We have analyzed the average price above. For the construction of this average, some properties had a strong positive appreciation, but others were devalued. You may have been lucky enough to be on the positive side of average.

Real estate funds do not follow a different movement. After all, they are immobile. However, most are commercial properties.

Each type of property follows a different price dynamics in the short and medium term.

You can make an analogy of the different real estate segments to the sectors of companies traded on the stock exchange. Each of the sectors, for example retail, education, banking and commodities, will have its own dynamics. An aggregate of these sectors is the Ibovespa index.

Likewise, when thinking about real estate funds, there is the IFIX, which is the aggregate index of real estate funds, calculated by B3, but there are different segments. Each of them may have different price variations in the short term and also different from the residential segment.

As explained for residential real estate, in the long run, all these segments of real estate funds tend to have the same relationship with inflation.

The table below shows annual and cumulative IFIX returns. To compare with the residential segment, I included the return on rent net of fees and income tax which is around 0.3% per month.

Thus, over the past 10 years, buying residential real estate, on average, has been worse than holding a diversified portfolio of real estate funds when considering capital gain and rental returns.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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