Updated: Does residential property hedge against inflation?

The Sun recently ran an article on whether residential property was a hedge against inflation, citing a simple correlation analysis of the annual data series of residential real estate returns and inflation rate that suggested housing can be a valuable investment asset. For a link to the full article in the Sun click here.

Propertyguru's 1H2022 Consumer Sentiment Survey suggested many Malaysian property buyers expect house prices to increase, noting inflation is picking up. For the full PropertyGuru press release, click here.

RC's take on the above:

Yes, inflation is rising worldwide. In the US core inflation has spiked up 6% recently according to the Economist. The business magazine expects the Fed to hike interest rates up sharply to rein in inflation. In Malaysia, Kay Hian UOB expect Bank Negara Malaysia to increase interest rates twice in 2022. Another stockbroking house CIMB has raised its 2022 inflation forecast by 0.3% to 2.5%, citing adjustments to more persistent commodity prices as well as recent developments including price controls and higher electricity tariffs for non-domestic users.

But a recent 2018 doctoral dissertation by Ms Yeap Geok Peng at University Sains Malaysia at Penang found no evidence that in the long run Malaysian housing is an inflation hedging asset, except for detached houses. Terrace houses were found to be a hedge against inflation in the short run only.
Her thesis, “House Prices In Malaysia: Demand, Supply And Inflation Hedging Ability” examined house prices in Malaysia from three aspects - housing demand, housing supply and housing returns over the sample period from 1Q2000 -4Q2015. She used empirical models based on a statistical Autoregressive Distributed Lag (ARDL) approach.

The results of her statistical analysis show that on the demand side, house prices are mainly driven by population and quantity of housing stock, while economic factors such as income and interest rate appear to display a less significant role in determining long-run house prices in Malaysia.

Based on my experience as a 20+ years long term property investor in the micro KLCC property market, some 5* freehold. KLCC luxury condominiums are not effective hedges against inflation. See here.

My first KLCC property has an estimated current market value of RM750psf according to two KLCC Area Specialists I contacted last year. Over the past 20+ years the price of my freehold 5* luxury KLCC condominium - it was one of the most expensive KLCC condominiums in 1999- has therefore appreciated by barely 50% from my purchase price of RM500 psf in 2000. And that is in nominal terms. Because of inflation, I think everyone will agree with me RM500 psf in 2000 is not the same as RM500 psf in 2021. If adjusted for inflation over 2000 to 2021, ie over a twenty year period, the current market value of RM750 psf is BELOW my inflation adjusted purchase price ( after a 10% discount) in 2000. In other words, my first KLCC property investment has not kept pace with inflation over the past twenty’s years since 2000.

I also previously noted landed properties in Bangsar have performed significantly better as inflation hedges ( my Better Half’s two relatives each bought a two storey detached house at Lorong Kemaris at RM77,000 each in the 1970s. Renovated detached houses at Lorong Kemaris now sell much higher prices in 2022, see here.
Or raw land in a rural area. My Dad and Mum bought a piece of land for its address, so I could attend the top high school in the state. They sold that piece of raw land for RM180,000, a 900% ROI . Your experience as a high end property investor might be different, of course.