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Real Estate as a Hedge Against Currency Devaluation

Help clients understand the cyclical nature of the economy and use these seven tips for identifying a good investment.

October 15, 2020
by Tom Gil

3 Takeaways:

  • Cash savings are negated by the yearly inflation rate.
  • Not all markets are affected equally during financial downturns.
  • When volatile assets are facing recessions, hard assets, such as gold and real estate, thrive.

Financial turmoil in the market can be disquieting and excruciatingly painful. The global pandemic has led to the biggest economic crisis since the Great Recession, with the unemployment rate still as high as 8% in September. Plus, the Federal Reserve has increased the printing of money since the crisis began, raising serious concerns about the U.S. dollar and how we can protect ourselves if its value continues to drop.

The good news? Real estate can be a hedge against currency devaluation.

Uncertain Times

Some potential real estate buyers—including sellers weighing a move-up—have objections based on bad experiences. They may have purchased a home in 2005, when they put down their life savings as a down payment only to see their home lose significant value during the recession. Yes, the home has likely regained its value, but only after a decade of agony. And they may fear another possible recession that resembles what happened in 2008, when home values dropped sharply and painfully.

Prospects may also be choosing to save cash instead of buying or investing in real estate to mitigate the potential of greater uncertainty to come.

While those concerns are legitimate, they may be a little misguided. The economic repercussions of the pandemic differ significantly from those that resulted in the Great Recession, which was the product of the housing market collapse, not vice versa. Things have drastically changed since 2005, and regulations now protect against the predatory lending that contributed to the crash.

As for saving cash, keeping money idle in an account can turn out to be dangerous in times of increased printing of money. Printing more money “for free” makes the bills that consumers work hard to save worth much less.

The yearly inflation rate is 2% and consumers have a return rate of 1% (if you’re lucky) on their savings account. The return is immediately negated by the yearly inflation rate. Yes, inflation is “a hidden tax on your money,” and an inflation increase is looming.

But U.S. consumers should consider themselves lucky. In Germany, they’d have to pay the bank to keep their money (i.e., negative interest rates).

Meanwhile, compared to the housing market, the stock market is riskier and offers a lower payoff.

It’s no coincidence that gold prices have surged lately. The correlation between gold and the housing market has already been unequivocally proven. When volatile assets are facing recessions, hard assets, such as gold and real estate, thrive. Historically speaking, residential real estate has done better compared to other markets during and after recessions.

As real estate professionals, you can shift consumers’ mindsets from fears of downsizing to hopes of opportunity, stability, and expansion.

The Cyclical Nature of the Economy

There are four financial seasons, and expansions occur in financial winters—when most can't make the investment. Some of the biggest corporations on the planet started during recessions:

Housing Market Graphic

  • IBM (1896)
  • Disney (1923)
  • Microsoft (1975)
  • CNN (1980)
  • Apple (2001)

Crises, human-made or not, such as the 1907 panic or 2008 bubble, are times of paradigm shifts. Those with leverage are using the fact that 30-year mortgage rates are now at an all-time historical low. The strong are looking to get stronger, and property sales are booming.

“We are seeing unprecedented demand at the moment, coupled with low inventory. ... The demand for properties has been very strong, especially for this time of the year,” says Bill Gassett, an agent with RE/MAX Executive Realty in Hopkinton, Mass.

Even international luxury and resort markets are seeing real estate thrive. “For many agents, this has been the busiest season they have ever had. We’ve seen over $236 million in residential sales year to date,” says Fleur Coleman, residential sales leads specialist for Provenance Properties in the Cayman Islands.

The Cayman Islands’ residency-by-investment programs and tax neutrality were already enticing real estate investors. Making them even more appealing to buyers recently is how well the Cayman Islands have handled the pandemic, Coleman says.

“There is a growing demand for private homes and luxury beachfront condos, which are, of course, priced at the higher end of the market and are the best choice right now as they present an opportunity to generate rental income,” she says.

Commercial real estate, on the other hand, has been hit hardest in the pandemic due to businesses closing and more people working from home.

Shai Ben-Ami, a broker with Urban Core Group who specializes in development sites in downtown Miami—where the virus has hit particularly hard—says commercial transaction volume is still low compared to pre-pandemic levels. “Most institutional and strategic investors are pausing at the moment, waiting on the sidelines for possible reductions in pricing or distressed assets,” he says.

Smaller footprints were already an existing trend in commercial real estate pre-COVID-19, Ben-Ami says, which he predicts will only continue. While the food and beverage landscape is going through some specific changes, there’s a greater need for more versatile spaces that can function as takeout-only “ghost kitchens,” along with a growing demand for outdoor spaces.

7 Tips to Guide Buyers and Investors

  1. Advise buyers not to overleverage themselves. Your clients should put some cash aside. Flat currencies are still a storehold of wealth (albeit a poor one) since President Nixon severed the dollar’s link to gold back in 1971. Plus, everyone needs some cash on hand for emergencies.
  2. Ensure an investment property offers enough cash flow. This isn’t a risky, idle form of cash—it’s cash that’s working for the investor. Even if your client’s property does lose value, it’s highly likely that it will keep cash flowing during a recession if it did prior to it. Read my feature on how to invest wisely and check out the National Association of REALTORS®’ recent webinar “The Ultimate Guide to Real Estate Investing,” with Michael Simpson, commercial broker and founder of the National Commercial Real Estate Association.
  3. Study the market. Help your clients research locations before pulling the trigger. Focus on residential in high-demand areas. A-class quality properties are more recession-proof. “Long-term investors can’t go wrong with buying rental properties out in the suburbs,” Gassett says. “There is a strong push right now of people leaving the city. More and more people want to find something in a less populated area which still has all of the modern conveniences.”
  4. Playing to win requires a game plan. Help your investor clients set goals and long-term strategies that will diversify their portfolio with different types of properties in cities or markets. Not all areas are affected equally during financial downturns. Focus on the long term with the notion that recessions will always come.
  5. Don't panic and sell when prices hit bottom. Because you know recessions will come and go, advise your clients to let the tsunami pass if they can. Economic cycles are a given, and real estate prices historically have always gone up and rentals have always kept cash flowing.
  6. Use uncertain times to your advantage. Record-low interest rates are an example of an opportunity for your buyer and investor clients to scoop up properties, while others who are low on liquid reserves end up selling in a panic.
  7. Money is usually made when buying, not selling. Understanding this paradox is vital for your clients, especially if currency continues to lose value and/or the country enters a full-blown recession, because those are not ideal times for homeowners or sellers. A gem of a deal will protect their investment later on.

Help your clients develop resilience—both mentally and financially—by educating and preparing them for potential market changes ahead. Residential properties are a “forever-money” investment, the type that not only makes a portfolio stronger but are also resilient to currency devaluation.

Even in a future in which cars fly, chips in our brain can store thoughts on cloud servers, and tickets to space are for sale, people will still need a place to call home and lay their heads at night. Real estate will always be needed, even if it’s on Mars.


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