How does real estate investment serve as a hedge against inflation?

Real estate investment serves as a hedge against inflation primarily because property values typically rise over time. When inflation occurs, the costs of goods and services increase, and many tangible assets like real estate tend to appreciate in value in response to this economic phenomenon. Investors often find that as the inflation rate increases, the value of properties will also rise, providing a means to preserve and even enhance purchasing power.

Moreover, real estate can generate cash flow through rental income, which often has the potential to increase along with inflation as demand for rental properties rises. Landlords may raise rents in line with inflation, resulting in higher rental income which further enhances the investment's ability to keep pace with inflation.

In contrast, if property values were to decrease over time or if rental income were fixed and unresponsive to inflation, real estate would not effectively serve as a hedge. Additionally, declining equity levels in real estate due to market factors would denote a loss of value and not support the position of real estate as a hedge against inflation. Therefore, the concept that property values typically rise over time is what underscores the protective feature of real estate investments against inflation.