With inflation running incredibly high, investors are looking for inflation hedges, could land be an inflation hedge?
Today, we will look at why the land could be used as an inflation hedge, and how the price of land has behaved historically during periods of increased inflation.
Why is land an inflation hedge?
Land is an inflation hedge because as prices across tend to rise, so does the price of assets that are scarce such as land. Investors should also consider an increase in the money supply, which in turn increases the price of land. Land is scarce, and although its demand might fluctuate over the short term, it tends to grow globally over time, as the population worldwide continues to increase.
Over the last 100 years, the value of farmland across the US has continued to rise. This reflects not only the scarcity of farmland but also the decline in the purchasing power of the dollar.
Source: FBFS
Does land do well in inflation?
Land tends to do well during inflationary periods. The historical data shows that land prices tend to rise following periods of high inflation. Coincidentally, the spikes we see in the price of farmland are correlated with inflation. Following periods of high inflation, land prices tend to go up, which shows that land can be an inflation hedge.
Source: Visual Capitalist
The value of the dollar has continuously declined during the same period. When there are more dollars in the system demanding the same amount of land, it is clear that the prices are forced to rise over time. Even if during a period of a few years they decline.
Is farmland a hedge against inflation?
Farmland is an investment that could be a hedge against inflation. This is because the demand for farmland is relatively stable, and in fact, it will continue to increase as the global population increases.
The continuous increase in commodity prices also continues to drive inflation upward and makes it extremely attractive to own farmland. This means that farmers are expected to have higher revenues, and therefore farmland owners see the value of their investment increase.
Bill Gates has been known for being a tech tycoon, however, he has recently become the largest private farmland owner in the US. His investment makes sense, not only because it is a hedge against inflation, but because the demand for agricultural commodities continues to increase as the global population keeps rising.
This coupled with the increase in agricultural commodity prices makes farmland one of the best investments to hedge against inflation.
Is land a good hedge against inflation?
Land remains one of the best inflation hedged investments available. It offers several advantages, to investors. Including:
- Simple investment
- Land is scarce
- Increase in demand for land
- Lower competition
- Value of the land protected against inflation and devaluing the dollar
Simple investment
One of the biggest advantages of investing in land is the fact that it is a fairly simple investment. Especially when compared with stocks, or other complex financial products. This makes it attractive for retail investors that are looking to hedge their investments against inflation.
The process of buying land is also a lot more simple. The due diligence process is straightforward, and it is a lot easier to value land than residential and commercial real estate for example.
Land scarcity and increased demand
Land scarcity continues to be one of the great advantages of investing in land. With the global population expected to reach 9.9 billion in 2050, this represents an increase of ~27% in just 30 years. This means that on average the demand for land will increase by the same amount.
Land will remain a scarce asset, and therefore its value will tend to increase over time.
Lower competition
One of the most attractive points of investing in land is that it is a lot less competitive than traditional commercial, residential, and industrial real estate. If we also compare it to stocks, and other financial products, land is one of the assets with the lowest competition.
This makes it easy not only to find opportunities but to also invest large amounts of capital, in the same way, that Bill Gates has done over the last few years.
Inflation hedge
Another clear advantage is the fact that land is an asset hedged against inflation. This makes it a particularly compelling investment. Given the high rate of inflation that is expected to continue over the course of the next few years.
Conclusion
Land remains one of the best investments to hedge against inflation. During the current inflationary period, it is fairly difficult for investors to find the right asset classes to protect their wealth and their purchasing power. Land remains one of the most attractive investments during this period.