As inflation threatens to be the theme in the next couple of months, investors are looking to diversify their portfolios. Read on to find out why we think Mexico Real Estate is a great option to combat inflation.
What is inflation?
Inflation is the economy of a marketplace when the prices of your overall essential products and services begin to increase. Now you need more units of the currency with which you usually purchase the goods and services to purchase the same amount compared to the previous period. Therefore the purchasing power of the consumers becomes weaker, the savings you hold in currencies diminish, and overall wealth shrinks.
How does this affect my economy?
The main effect is a decrease in the overall wealth of an individual. Individuals will need to increase their wages, salaries, or the prices they charge on an equal amount of the rise of general prices to combat inflation and maintain their wealth value. Suppose an individual is unable to increase their income. In that case, he will need to decrease his consumption and find more economical substitutes for products and services he was purchasing previously. This way, he will be able to equalize their income versus expenses to the same positive rate that occurred before the onset of inflation.
What can I do to combat inflation?
In inflationary times, people must increase their business activities and incomes to protect their wealth levels. Otherwise, it will slowly deteriorate. As mentioned above, holding your wealth in the currency will not hedge nor protect your overall purchasing power. On the contrary, it will decrease. Historically, tangible assets are a good investment option during inflationary periods. And those tangibles tend to hold their value, unlike paper assets. Tangible assets include Gold, Silver, precious metals, and real estate, among others.
Everything indicates that inflation periods will be on the horizon in the summer of 2022. Given that fact, I advise you to review your current portfolio with your consultant.
Logically, some industries and corporations tend to do well in these periods. The oil industry, for example, during the current situations in Ukraine and the Russian invasion, is seeing strong prices that we have not witnessed in the past decade. And international stocks might be an option worth reviewing to add to your new strategy.
Does inflation affect the real estate sector?
Absolutely. One of the primary effects of inflation is the increased costs of loans and mortgages. So the consumers must now re-evaluate their real estate purchasing plans and may need to hold off for one or two years. Constructors also have to incorporate new costs of materials and labor into the selling price of the new homes. This commonly causes a contraction of new home sales projections. So existing homes for sale now have less competition and more attention from potential buyers. As a result, it nudges the demand a bit higher for resales or into the rental market. Therefore these two factors mentioned above will pile more demand into the rental marketplace. As the demand for rental properties increases, it pressures the rental rates to increase.
A different factor that affects the rental rates negatively from inflation has to do with the vacation rental revenues. During inflationary periods, people need to cut back on their expenses. So long-distance vacations or vacations traveling by air might be one of the family plans to be canceled. With the decrease in demand for vacation rentals, the asking rental price per night will tend to fall.
How is Real Estate a hedge to combat inflation?
Rental rates are usually one of the items that rise steadily along with the overall inflation. This increases the cash flow towards the owner of Mexico real estate or any property within any country.
As the rental rates increase, investing in homes becomes more attractive, and investors start appearing. Again, as demand increases, upward pressure on the asking price continues. Let’s say that in previous years, a particular neighborhood or house market was already feeling a shortage of housing supply. And now it faces an inflation period, then the security of the real estate investment only increases.
Does land ever lose value?
There is a saying, “you cannot produce land .” If you cannot increase the supply, and the demand remains or increases, this puts all the pressure on appreciating the value. This effect is easier to see on an island, even on a popular hilltop neighborhood such as Mount Adams in Cincinnati. Whenever you have a limited amount of land and constant demand, the pressure will cause great appreciation opportunities.
There are extraordinary examples where you will see a loss of demand, too, though. These are not common, and the signs are often very clear and evident. And it allows the landowners to adjust or exit before tremendous losses. For example, when large companies shut down and the subsequent loss of jobs. This causes families to move from their neighborhoods in search of other places where jobs flourish. A disaster area, constant flooding, and constant fires will obviously discourage new families from investing their wealth. No one will want to buy there, especially with such risks of recurrence and loss of home. Therefore the demand for such land decreases accordingly.
Although losing value in real estate does occur, this is very rare. Also, the probability that all real estate increases in value with the oncoming increases in population and new jobs within specific neighborhoods and regions is much higher.
Why is Mexico a great place to invest in Real Estate?
Mexico is a very interesting and attractive market for real estate investing. One of the main reasons is the geographical proximity to one of the world’s strongest economies, the USA. Second, Mexico has transitioned from a third-world country to a developeing country over the past several years. It is one of the top 15 largest economies in the world. As the economies grow and families continue gaining more purchasing power, the demand for housing increases throughout the country. And this is especially true in various zones where natural beauties exist. Larger cities are producing more jobs. Internet communications and satellite workstations allow medium-sized cities to continue attracting more families to raise their families.
Additionally, picturesque mountain villages and beachside communities continue to break records in attracting international tourists and full-time dwellers.
As the ex-pat communities continue to break records in Mexico, nearly 2 million Americans are retiring or living full-time in Mexico. The snowball effect has only increased in the past several years.
Investing in these beautiful, immature Mexico real estate regions has created great appreciation opportunities for many international investors.
Since people now compare Mexican beachside towns to larger cities of Florida, Alabama, and California. Therefore, home buyers are now finding very competitive factors in the Mexican market to lean them towards purchasing internationally. This tendency will only increase during the next decade.