The Inflation Paradox: How Your House Loses Value Over Time

The Inflation Paradox: How Your House Loses Value Over Time

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Introduction

Inflation, the gradual price increase over time, is a common economic phenomenon affecting consumers’ purchasing power. While it is often associated with everyday goods and services, the impact of inflation extends to major assets, including residential properties. This article explores the inflation paradox, wherein the rising sticker prices of homes belie their actual value as the purchasing power of money diminishes over time.

Inflation Erodes the Purchasing Power of Money

Inflation erodes the purchasing power of money, meaning that a fixed sum of money will buy fewer goods and services over time. This decrease in purchasing power extends to real estate, making it susceptible to a devaluation process, even as the nominal price of homes increases.

Impact of Inflation on Housing Prices

The housing market is not immune to inflation. Over the years, the real estate sector has experienced price appreciation, leading to a rise in housing prices. However, it is essential to differentiate between nominal and real value. The nominal value represents the numerical sticker price of a property, while real value accounts for inflation-adjusted purchasing power. Here is a simple analogy about how an increase in the numerical value of your house does not equate to its actual value.

 

Imagine Mr. A bought a house in 2004 for $475,000; he then sold the house for $625,000 in 2018. He has gained $150,000 in 14 years; not bad, right? Wrong. Here’s why. The government sets inflation at 2% per year. Remember that over 14 years, there has been a compounding effect. 

 

Calculating compound inflation is 1.02 multiplied by $475,000 14 times to get the inflation figure over 14 years. When that is done, you should get $626,752. So, regarding purchasing power, Mr. A’s house is down by $1,752. Now, if we use the inflation calculator the government used in the 1970s, inflation is pegged at 8%. At 8%, for Mr. A. to have retained the value of his house, he would have to sell it at $1,395,166. 

 

In either scenario, Mr. A lost the value of his house. Even though, numerically, he sold at a higher rate.   

The Inflation Paradox in Real Estate

The inflation paradox occurs when the nominal value of a house increases due to inflation, but its real value diminishes over time. Homebuyers may find themselves paying more for a property compared to the past, but when considering the erosion of their money’s purchasing power, the property’s actual value decreases.

Factors Contributing to the Inflation Paradox

  • Wage Growth vs. House Prices: Wage growth often fails to keep pace with inflation and rising home prices. As a result, homeowners may need help to maintain their standard of living while also experiencing a decrease in the real value of their homes.

 

  • Housing Bubble and Speculation: Housing prices can rise significantly during high inflation and speculative bubbles. However, these artificial price hikes may not reflect the property’s actual value, leading to a correction when the bubble bursts.

 

  • Interest Rates: Low-interest rates can stimulate housing demand, driving up prices. Yet, this demand may not reflect an actual increase in the property’s intrinsic value, exacerbating the inflation paradox.

Long-Term Impact on Homeowners

The inflation paradox can have significant implications for homeowners, particularly those planning to sell their property in the future. Homeowners may find that their house’s appreciation in nominal value does not translate into a substantial return on investment when considering inflation-adjusted returns.

Mitigating the Inflation Paradox

Fighting inflation using gold and silver involves utilizing these precious metals as a hedge against the erosion of purchasing power caused by rising prices. Historically, gold and silver have been considered stores of value, and investors often turn to them during economic uncertainty and inflationary pressures. Here are some strategies for using gold and silver to combat inflation:

Diversification of Investments

Including gold and silver in an investment portfolio can provide diversification, which is essential for reducing risk. Traditional assets like stocks and bonds may suffer when inflation rises, but precious metals tend to retain or increase their value. Diversifying your portfolio with gold and silver creates a buffer against inflationary pressures.

Physical Ownership of Precious Metals

Investors can purchase physical gold and silver in the form of coins or bars. Owning physical bullion allows you to directly hold and store the precious metals, ensuring that their value is not dependent on the performance of financial institutions. Physical ownership provides a tangible asset not subject to counterparty risk, making it a reliable option during periods of high inflation.

Precious Metals ETFs and Funds

For those who prefer not to store physical metals, investing in exchange-traded funds (ETFs) or mutual funds that track the price of gold and silver can be a viable option. Precious metals ETFs and funds offer a convenient way to gain exposure to gold and silver prices without needing physical storage.

Investing in Mining Companies

Investing in mining companies is another strategy to fight inflation using gold and silver. As the demand for precious metals increases during inflationary periods, mining companies may see their profits rise, potentially increasing their stock prices. However, investing in individual mining companies carries higher risks compared to investing in the metals themselves or funds that track their prices.

Dollar-Cost Averaging

In uncertain economic times, dollar-cost averaging can be an effective approach. This strategy involves regularly investing a fixed amount in gold or silver, regardless of the market price. Dollar-cost averaging helps mitigate the impact of short-term price fluctuations and allows investors to accumulate precious metals at various price points.

Monitor Economic Indicators

Keep a close eye on economic indicators and inflation reports. When inflationary pressures are anticipated, consider adjusting your investment strategy to include a higher allocation to gold and silver. Being proactive and staying informed about economic trends can help you make well-timed investment decisions.

Conclusion

The inflation paradox presents a compelling case for homeowners and potential buyers to look beyond the nominal price of a property and consider its actual value in real terms. Inflation erodes the purchasing power of money over time, leading to a decrease in the real value of assets, including residential properties. Awareness of this phenomenon can empower individuals to make informed decisions, ensuring their investments align with long-term financial goals despite the inevitable impact of inflation on the housing market.

 

So you have decided to buy silver online.

Great choice. Let’s talk about silver.

Silver is exceptionally popular today. Part of the reason for this is the belief that it’s potential for upside value increase is even greater than the same belief in gold. In fact, there is a very good book on this subject entitled: “ Why Silver Will Outperform Gold by 400% in the coming years”. It’s a very scholarly book and quite convincing. Give it a read if you have the time.

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Mind you, one need not look as far as that book to find evidence of the common belief that silver has great potential for growth in the near future. All one has to do is go to the web or even Youtube and there are advocates of this thought at every turn.

At Durham Precious Metals we believe that silver is an easy choice because it gives a sense of substance due to its lower cost per ounce than gold.

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Probably 90% of our business is silver sales so this sentiment is fairly unanimous throughout the public. 10oz bars seem to be the most popular. Generic rounds and Silver Maples seem to be the next most popular and 1oz bars a close 4th place. It is our opinion that 10 oz bars and 1oz rounds are your best value as their premium over spot is very reasonable. However, there is no wrong choice when it comes to our silver product line because we try to concentrate on product lines with low premiums anyway.

Silver has always been a form of money. There are those that will argue that silver has been demonetized but we beg to differ. All one has to do is refer to the (CCRA) definition for 999 bullion. It is deemed by Rev Can to be a “ financial instrument”. Enough said on that subject!

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From a utility standpoint, silver has somewhere in the neighbourhood of 60,000 industrial uses including painting the backs of mirrors to create the reflective surface to collecting radiation in solar panels. If nothing else, the lack of an above ground supply of silver ( which is relatively new historically) will keep the demand for this metal strong since for most applications there is no viable substitute.

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Can you imagine the mayhem that would ensue if all the major electronic manufacturers came grinding to a halt due to a silver shortage? It would be catastrophic to the economy. We believe that this fact alone will be a major driver of support for the silver price when the powers that be run out of tricks in their attempt to suppress the price of silver. And yes, we agree that this practice goes on in plain sight and that the regulators turn a blind eye. Let’s hope justice prevails and that the historic silver/gold ratio returns to its traditional level.

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In the meantime…keep stacking!

So you have decided to buy gold online.

Great choice! Let’s talk about gold then, shall we?

Gold is, and always has been, a favorite of collectors of precious metals. Its 6000-year history of sustaining wealth is unprecedented. The yellow metal has launched wars, bought fortunes and has been a form of money throughout that history. It is one of the densest metals and also one of the densest elements on the periodic table. It weighs in at a density of 19.32 grams per cubic centimeter. Water, by contrast, has a density of 1 gram per cubic centimeter.

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Platinum is the densest of the common 4 precious metals at 21.45 grams per cubic centimeter.

People will often ask when gold is the right choice to buy as opposed to other metals such as silver. This is a very common question. There is no easy answer that anyone can give to someone so we always boil it down to practical applications.

Gold Bullion

Consider how much of an investment you are planning to make over-all throughout the course of your precious metals buying.  If you are planning on purchasing, for example, $10,000 worth of metals and then cap your spending then it really doesn’t matter which metals you buy. The volume of the purchase will be relatively small in terms of weight and size. Our main concern and Durham Precious Metals comes down to simple things like , cost of storage, cost of shipping and bulk. We are always trying to help our customers have the best experience as metals collectors.

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For example, if you were to tell us that you are considering selling a piece of real estate and use the proceeds to buy metals then gold would be our suggestion. The reason comes down to volume and weight at this point. Several hundred thousand dollars of silver would be an incredible amount of bulk at this spend level. Hundreds of pounds of silver would be hard to store practically and would be more expensive to store as well. If you are the DIY type it would also be harder to hide than a comparable dollar amount of gold.

Keep in mind that at the time of this writing gold is about 75 times more expensive in dollar terms as the same weight of silver. That equates to 75 times less bulk per dollar spend. This will make it much easier to hide or store if you are looking at large purchase amounts.

Price of Gold?

If you are only considering a small total purchase amount either of the metals is perfectly fine. The one consideration we always emphasize for small purchase amounts really comes down to personal perception. Here is what we mean. Silver is 75 times more bulky per dollar spend. Obviously, it is going to feel a lot more substantial if you buy $5000 worth of silver and have several hundred ounces to admire than only about 3 ounces. It’s a perception thing at this point but perception matters to people since perception can make us feel a particular way about what we spend our money on.

In closing, gold and silver are both great choices and neither is wrong in terms of their value of utility. They have both had a long history as a store of wealth and that isn’t likely to change any time soon.

Buy both with confidence. Buy Gold Online

We often carry pieces that we don’t list on site so feel free to call us for an up-to-date list.

About DPM

When you consider silver value and gold value, the wise choice is to stock up today. At Durham Precious Metals we make it easy and convenient to buy silver and buy gold online.

For those who are serious about investing in gold and silver bullion, DPM is your one-stop store to buy gold and buy silver, whether it be through our website or our retail store.

Many people want to know where to buy gold and do not realize they can avoid the traffic hassle of driving into the city and visit us at DPM located in Oshawa, Ontario. See our Retail Store page for directions. Our customers are delighted with our competitive silver price. We carry mint direct silver bars, silver coins, gold bars and gold coins.

Make Durham Precious Metals your choice for gold and silver bullion.

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