PROPERTY INVESTMENT: A GOOD HEDGE AGAINST INFLATION

Abstract

Over the last ten years or so, the prices of real properties in Singapore have risen considerably. As a result, many have expressed the opinion that real estate is an attractive form of investment and a good hedge against inflation. There are, however, few studies that have actually been carried out to authenticate this opinion. The primary aim of this study is, therefore, to examine the extent of real estate investment as a hedge against both expected and unexpected inflation. For this purpose, an inflation hedge model is formulated to test the Fisher Hypothesis, that the nominal return on an asset consists of a real return plus an expected rate of inflation. In this study, private residential landed property is selected to study its hedging strength against both expected and unexpected inflation. The measure for the rate of return on real property is the holding period return which can capture both the components of price appreciation and rental earnings. The tax assessor's Annual Value data is used as a surrogate for market rentals. The inflation rate is approximated by the Consumer Price Index (CPI). A multiple regression model is tested in the empirical context of private residential property, which is further dealt with in terms of different geographic locations and types. The paper concludes with the assertion that real estate provides a complete hedge against unexpected inflation and a partial hedge against expected inflation. The test by property type shows strong inflation protection for terrace houses, followed by semi-detached with bungalow properties having inconclusive results. When the test is carried out for different districts, the greatest inflation protection is for District Central, followed by District East. The test is inconclusive for District North and District West.fV The results of this study provides evidence that terrace houses provide a better hedge than bungalow houses and houses in District Central have greater inflation hedge than the other three districts.