Is investing in housing considered an adequate hedge against inflation?
Yes, in 2 ways: As you mention, the price of a home generally grows with inflation - along with other factors (supply and demand in local markets, etc.). Through financing. If you finance 80% of your purchase today, in 2014 dollars, you will pay back in future dollars. Those future dollars are worth less, because of inflation. "Even if the price of your home did match inflation or better — and that's a question I'll let the other answers address — I propose that owning a home, by itself, is not a sufficient hedge against inflation. Consider: Inflation will inflate your living expenses. If you're lucky, they'll inflate at the average. If you're unlucky, a change in your spending patterns (perhaps age-related) could result in your expenses rising faster than inflation. (Look at the sub-indexes of the CPI.) Without income also rising with inflation (or better), how will you cope with rising living expenses? Each passing year, advancing living expenses risk eclipsing a static income. Your home is an illiquid asset. Generally speaking, it neither generates income for you, nor can you sell only a portion. At best, owning your principal residence helps you avoid a rent expense and inflation in rents — but rent is only one of many living expenses. Some consider a reverse-mortgage an option to tap home equity, but it has a high cost. In other words: If you don't want to be forced to liquidate [sell] your home, you'll also need to look at ways to ensure your income sources rise with inflation. i.e. look at your cash flow, not just your net worth. Hence: investing in housing, as in your own principal residence, is not an adequate hedge against inflation. If you owned additional properties to generate rental income, and you retained pricing power so you could increase the rent charged at least in line with inflation, your situation would be somewhat improved — except you would, perhaps, be adopting another problem: Too high a concentration in a single asset class. Consequently, I would look at ways other than housing to hedge against inflation. Consider other kinds of investments. ""Safe as houses"" may be a cliché, but it is no guarantee." Becoming a landlord is a pretty roundabout way to hedge against inflation. Why don't you research TIPs (Treasury Inflation Protected Securities (?)) Over the very long term, a house will just about match inflation, but no more. I observe that it (median home price) has remarkably tight correlation to the mortgage one can buy with a week's worth of median income based on the 30 year rate. In other words, strip out inflation, wage gains, and the effect of the 30 year rate peaking at 18%, then dropping to 4%, and home prices have flatlined for a century.  I agree with mhoran. My answer is for the median, theoretical home. As they say, YMMV, your mileage may vary. As in, you can't have one. No, there is no linkage to the value of real estate and inflation. In most of the United States if you bought at the peak of the market in 2006, you still haven't recovered 7+ years later. Also real estate has a strong local component to the price. Pick the wrong location or the wrong type of real estate and the value of your real estate will be dropping while everybody else sees their values rising. Three properties I have owned near Washington DC, have had three different price patterns since the late 80's. Each had a different starting and ending point for the peak price rise.  You can get lucky and make a lot, but there is no way to guarantee that prices will rise at all during the period you will own it.
"A home is an investment, but the value it returns isn't primarily financial ($$) - they are consumption (a place to live). This gives it different characteristics than other investments (e.g. increasing the amount invested by buying a more expensive home doesn't do much to assist your financial well-being and future income, and isn't necessarily the ""responsible"" thing to do). You may get some capital gains, typically in line with inflation, sometimes less, sometimes more, but those aren't the most reliable, and it's difficult to realize them (it involves selling your house and moving). Its main value as a hedge is a hedge against rising rent. But if you're still working full-time and can expect cost-of-living increases, that hedge may not be as valuable to you as it would to, say, someone living on a fixed income. But as for treating it as a ""low-risk investment""? That's very problematic. Real low-risk investments are things like government bonds, where you can't lose principal. Unless you're going to live into your house until the day you die, the real estate crash should have disabused you of any notion that housing values never go down. Rather, your house is a single, indivisible, undiversified, illiquid investment. Imagine, if you will, going to your brokerage and borrowing a hundred thousand dollars or more on margin to invest in a single real estate investment trust... then take away whatever diversification the trust offered by holding multiple properties. Also, you can't sell any of it until you move away, and the transaction fee will take something like 3%. Still sound ""safe""? Moreover, it's exactly the wrong kind of risk. Your house's value is tied to what people are willing to pay for housing where your house is, which is usually subject to the whims of the local economy. This means that in a recession and housing bust in the local economy, you can lose your job and have your mortgage go underwater at the same time. It totally makes sense to treat your house as an investment to some extent, and it makes double sense for a financial adviser to consider it as part of your investment recommendations. ""Safety"" is not the way you should be thinking of it, though." "If you are concerned about inflation, here are a couple of ""TIPS"". You can buy a mutual fund or ETF which adjusts for inflation. Here is one link which you may find useful: http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2010/12/02/etf-basics-how-to-fight-inflation" Inflation protected securities (i-bonds or TIPS).   TIPS stands for Treasury Inflation Protected Securities. By very definition, they tend to protect your savings against inflation. They won't beat inflation, but will keep up with it. TIPS or iBonds have two parts. A fixed interest part and a variable interest portion which varies depending upon the current rates. The combined rate would match the inflation rate. They can be bought directly from the treasury (or from a broker or bank who might charge a commission) The main point to consider is that your payments toward your own home replace your rent. Any house or apartment you buy will have changes in value; the value is generally going slowly up, but there is a lot of noise, and you may be in a low phase at any time, and for a long time. So seeing it as an investment is not any better than buying share or funds, and it has a much worse liquidity (= you cannot as easily make it to cash when you want to), and not in parts either. However, if you buy for example a one-room apartment for 80000 with a 2% mortgage, and pay 2% interest = 1600 plus 1% principal = 800, for a total of 2400 per year = 200 per month, you are paying less than your current rent, plus you own it after 30 years. Even if it would be worth nothing after 30 years, you made a lot of money by paying half only every month, and it probably is not worthless. You need to be careful not to compare apples with oranges - if you buy a house for 200000 instead, your payments would be higher than your rent was, but you would be living in your house, not in a room. For most people, that is worth a lot. You need to put your own value to that; if you don't care to have a lot more space and freedom, the extra value is zero; if you like it, put a price to it. With current interest rates, it is probably a good idea for most people to buy a house that they can easily afford instead of paying rent. The usual rules should be considered - don't overstretch yourself, leave some security, etc. Generally, it is rather difficult to buy an affordable house instead of renting today and not saving a lot of money in the process, so I would say go for it. "I do not believe there is a strong correlation between CPI (Consumer Price Index) and housing value appreciation. Take, for example, New York City which has the highest CPI in the US.  A great deal of the CPI number is skewed by Manhattan.  One can live in Brooklyn or Queens and avoid some of NYC's high CPI.  I would say that housing appreciation occurs because of the human activity in the area.  That same human activity is what drives the CPI.  There are other contributing factors, like limits on economies of scale.  You simply cannot set down a Super Walmart in much of NYC, so goods are distributed over a larger number of stores.  (Sure, NYC is a port city, but the goods are distributed within the city by trucks.) The San Francisco Bay Area is another high CPI area in the US.  Here, as well, it is the location that draws people.  While NYC is mostly about economic activity, the SF Bay Area is a mix of the draw of a great location and the economic activity that occurs due to the large number of people living there.  I know of a house in Oakland that sold for approximately $350k, in 2004/05.  It was located not too far from the ""Killing Fields,"" as they were known locally.  It was not the worst neighborhood in Oakland, but it was not very far from it.  This was for a shabby, single-story unit which I believe had 5 (maybe 6) rooms.  That is a lot of money for a house that required a lot of attention and was in a bad neighborhood.  I have no idea how the housing market is after the housing bubble, but the higher value areas had the most room to fall and many of them fell hard. Ultimately, it is supply and demand that determines the CPI and housing values.  This supply and demand is determined by the human activity in the area and some practical considerations regarding the area. A final note: If we are talking about a primary residence, it should not necessarily be looked at as an investment.  First and foremost, it is a necessity.  Second, if you need to hire people for the maintenance and/or upgrades, that will eat into your gains.  Contractors are not cheap, especially where they are in high demand.  Finally, the tax incentive is actually not that great.  Sure, you take what you can get, but its impact is relatively marginal." Two ideas. EDIT: you should also do alot of research about how to invest this money properly. Something low risk but will beat inflation by a margin. You start taking on some big risks when go to absolute zero. Unlike your plane analogy, you don't have to fly or not fly - you can opt to take a safer hybrid form of transit. Or to extend the analogy: now you're driving or walking instead of flying, which, per mile traveled, is statistically more risky, even if the plane 'feels' and 'looks' riskier.  Consider reading up a bit on the risks of all-cash/bonds (including: shortfall and inflation). Yes, real estate is a hedge, but most of your portfolio is still exposed to inflation. Why not also buy some Treasury Inflation-Protected Securities via a bond fund? Why not put 25% in the stock market to help do well when the markets do well?  I think if you do some reading on this you'll find yourself shocked at the risks of being all-cash. FWIW, I'm a relatively conservative voice on investing subreddits - the guy who is usually saying 'hey be sure to keep some bonds!.' So I'm all about a safe/balanced portfolio, but tilt too far in either direction and you take on more risk, not less.  You mentioned a pension and real estate. Those are presumably good inflation hedges and relatively stable holdings. The pension especially suggests you can take more stock risk, since you have that stable, bond-like holding.  The weirdest thing to me is that you would be 'all in' during the good times. If you're this risk adverse when you see warning signs, I'm curious: were you 100% stocks before? Totally on/off like that seems kinda intense. You can't get there from here.  This isn't the right data.  Consider the following five-year history:  2%, 16%, 32%, 14%, 1%.  That would give a 13% average annual return.  Now compare to -37%, 26%, 15%, 2%, 16%.  That would give a 4% average annual return.   Notice anything about those numbers?  Two of them are in both series.  This isn't an accident.  The first set of five numbers are actual stock market returns from the last five years while the latter five start three years earlier.  The critical thing is that five years of returns aren't enough.  You'd need to know not just how you can handle a bull market but how you do in a bear market as well.  Because there will be bear markets.   Also consider whether average annual returns are what you want.  Consider what actually happens in the second set of numbers:   But if you had had a steady 4% return, you would have had a total return of 21%, not the 8% that would have really happened.  The point being that calculating from averages gives misleading results.  This gets even worse if you remove money from your principal for living expenses every year.   The usual way to compensate for that is to do a 70% stock/30% bond mix (or 75%/25%) with five years of expenses in cash-equivalent savings.  With cash-equivalents, you won't even keep up with inflation.  The stock/bond mix might give you a 7% return after inflation.  So the five years of expenses are more and more problematic as your nest egg shrinks.  It's better to live off the interest if you can.  You don't know how long you'll live or how the market will do.   From there, it's just about how much risk you want to take.  A current nest egg of twenty times expenses might be enough, but thirty times would be better.  Since the 1970s, the stock market hasn't had a long bad patch relative to inflation.  Maybe you could squeak through with ten.  But if the 2020s are like the 1970s, you'd be in trouble. You can look at buying a house as being a long term investment in not paying rent.   In the short time there are costs to buying (legal, taxes, etc).   This depends on only buying house of the size/location you need e.g. no better then what you would have rented. House buying tent to work out best when there is high inflation, as the rent you would otherwise be paying goes up with  inflation – provided you can live with the short term pain of high interest rates. "Note: I am making a USA-assumption here; keep in mind this answer doesn't necessarily apply to all countries (or even states in the USA).  You asked two questions: I'm looking to buy a property. I do not want to take a risk on this   property. Its sole purpose is to provide me with a place to live. How   would I go about hedging against increasing interest rates, to counter   the increasing mortgage costs? To counter increasing interest rates, obtaining a fixed interest rate on a mortgage is the answer, if that's available.  As far as costs for a mortgage, that depends, as mortgages are tied to the value of the property/home.  If you want a place to live, a piece of property, and want to hedge against possible rising interest rates, a fixed mortgage would work for these goals. Ideally I'd like to not lose money on my property, seeing as I will be   borrowing 95% of the property's value. So, I'd like to hedge against   interest rates and falling property prices in order to have a risk   neutral position on my property. Now we have a different issue.  For instance, if someone had opened a fixed mortgage on a home for $500,000, and the housing value plummeted 50% (or more), the person may still have a fixed interest rate protecting the person from higher rates, but that doesn't protect the property value.  In addition to that, if the person needed to move for a job, that person would face a difficult choice: move and sell at a loss, or move and rent and face some complications. Renting is generally a good idea for people who (1) have not determined if they'll be in an area for more than 5-10 years, (2) want the flexibility to move if their living costs rises (which may be an issue if they lose wages), (3) don't want to pay property taxes (varies by state), homeowner's insurance, or maintenance costs, (4) enjoy regular negotiation (something which renters can do before re-signing a lease or looking for a new place to live).  Again, other conditions can apply to people who favor renting, such as someone might enjoy living in one room out of a house rather than a full apartment or a person who likes a ""change of scenes"" and moves from one apartment to another for a fresh perspective, but these are smaller exceptions. But with renting, you have nothing to re-sell and no financial asset so far as a property is concerned (thus why some real estate agents refer to it as ""throwing away money"" which isn't necessarily true, but one should be aware that the money they invest in renting doesn't go into an asset that can be re-sold)." There are two things you need to keep in mind when you look at Inflation as an entity. Inflation is necessary to keep in check the value of goods. As per Moore's Law for example, a mobile phone that you buy for £100 today will be available for £50 in two years. With increased purchasing power, one needs to maintain balance between the purchasing power and its value. If you think about the 'loss' at a rate of 2% you would have £96.04 (in terms of today's value) in two years. But if you looked at the same cell phone as leverage for your business where it allowed you to do work and earn £1000 in two years - the investment would clearly offset the cost of inflation. Inflation is incentive for people to spend their money. If you for example spent all of your £100 today, it is £100 income for someone else. He has further incentive to spend it creating a chain of transactions. In theory while this is a true mathematical loss, the increasing purchasing power helps you leverage your financial asset to get a return on your investment. "TL;DR - go with something like Barry Ritholtz's All Century Portfolio: 20 percent total U.S stock market 5 percent U.S. REITs 5 percent U.S. small cap value 15 percent Pacific equities 15 percent European equities 10 percent U.S. TIPs 10 percent U.S. high yield corp bonds 20 percent U.S. total bond UK property market are absurdly high and will be crashing a lot very soon The price to rent ratio is certainly very high in the UK.    According to this article, it takes 48 years of rent to pay for the same apartment in London.  That sounds like a terrible deal to me.  I have no idea about where prices will go in the future, but I wouldn't voluntarily buy in that market. I'm hesitant to invest in stocks for the fear of losing everything A stock index fund is a collection of stocks.  For example the S&P 500 index fund is a collection of the largest 500 US public companies (Apple, Google, Shell, Ford, etc.).  If you buy the S&P 500 index, the 500 largest US companies would have to go bankrupt for you to ""lose everything"" - there would have to be a zombie apocalypse. He's trying to get me to invest in Gold and Silver (but mostly silver), but I neither know anything about gold or silver, nor know anyone who takes this approach. This is what Jeremy Siegel said about gold in late 2013: ""I’m not enthusiastic about gold because I think gold is priced for either hyperinflation or the end of the world.""  Barry Ritholtz also speaks much wisdom about gold.  In short, don't buy it and stop listening to your friend.   Is buying a property now with the intention of selling it in a couple of years for profit (and repeat until I have substantial amount to invest in something big) a bad idea? If the home price does not appreciate, will this approach save you or lose you money?  In other words, would it be profitable to substitute your rent payment for a mortgage payment?  If not, you will be speculating, not investing.  Here's an articles that discusses the difference between speculating and investing.  I don't recommend speculating." "Consider property taxes (school, municipal, county, etc.) summing to 10% of the property value.  So each year, another .02N is removed.  Assume the property value rises with inflation.  Allow for a 5% after inflation return on a 70/30 stock bond mix for N.   After inflation return.   Let's assume a 20% rate.  And let's bump the .05N after inflation to .07N before inflation.  Inflation is still taxable.   Result  Drop in value of investment funds due to purchase.   Return after inflation.   After-inflation return minus property taxes.   Taxes are on the return including inflation, so we'll assume .06N and a 20% rate (may be lower than that, but better safe than sorry).   Amount left.   If no property, you would have .036N to live on after taxes.  But with the property, that drops to .008N.  Given the constraints of the problem, .008N could be anywhere from $8k to $80k.   So if we ignore housing, can you live on $8k a year?  If so, then no problem.  If not, then you need to constrain N more or make do with less house.   On the bright side, you don't have to pay rent out of the .008N.  You still need housing out of the .036N without the house.   These formulas should be considered examples.  I don't know how much your property taxes might be.  Nor do I know how much you'll pay in taxes.  Heck, I don't know that you'll average a 5% return after inflation.  You may have to put some of the money into cash equivalents with negligible return.  But this should allow you to research more what your situation really is.   If we set returns to 3.5% after inflation and 2.4% after inflation and taxes, that changes the numbers slightly but importantly.  The ""no house"" number becomes .024N.  The ""with house"" number becomes  So that's $24,000 (which needs to include rent) versus -$800 (no rent needed).  There is not enough money in that plan to have any remainder to live on in the ""with house"" option.  Given the constraints for N and these assumptions about returns, you would be $800 to $8000 short every year.   This continues to assume that property taxes are 10% of the property value annually.  Lower property taxes would of course make this better.  Higher property taxes would be even less feasible.   When comparing to people with homes, remember the option of selling the home.  If you sell your .2N home for .2N and buy a .08N condo instead, that's not just .12N more that is invested.  You'll also have less tied up with property taxes.  It's a lot easier to live on $20k than $8k.   Or do a reverse mortgage where the lender pays the property taxes.  You'll get some more savings up front, have a place to live while you're alive, and save money annually.   There are options with a house that you don't have without one." First off, inflation doesn't necessarily imply that goods and services will rise in price.  The amount of goods &amp; services increases over time as well, and this is balanced (partly), by an increase in the money supply.  Without inflation you lose the incentive to invest, as your dollar would become more valuable over time.  Why invest in a risky venture if I know that my dollar will buy more if I just wait it out.  Might as well stick the money under the mattress. (This is bad) Ahh the vest. The mark of a Finance professional. Seriously, I don't know of any other person outside of a Finance career that wears it. My theory is that it's warm and it lessens the need to re-tuck your shirt every few minutes for those that don't have tailored shirts.