Inflation and Real Estate Investments

Brad Case and Susan M Wachter

In this chapter we analyse the inflation sensitivity of real estate investments, comparing them to other inflation-sensitive assets. The most transparent source of real estate investment returns comes from publicly traded stocks of real estate investment trusts (REITs). We examine the available return data, with an emphasis on their relationship to US inflation, although our conclusions may apply elsewhere as well.

Consumer price inflation (CPI) in the US was 13.5% during 1979, the worst year since 1947. Dividend income from REITs traded through the stock exchange averaged 21.2% that year, and total returns amounted to 24.4%, not only preserving but increasing for REIT investors the purchasing power that they had lost to inflation. Inflation averaged 11.6% per year during 1978–80, the worst three-year period in six decades; again, however, publicly traded equity REITs outpaced inflation, with income and total returns averaging 12.2% and 23.1% per year, respectively. The period 1974–81 was the most inflationary eight years in the history of the Consumer Price Index at 9.3% per year, but equity REIT returns easily preserved purchasing power, with income and total returns