Is real estate still an inflation hedge?

Many view real estate like they do stocks, precious metals, and art. They theorize that if inflation runs rampant, the price of their properties and respective rents will increase and offset inflationary effects. In fact, some with assets carrying balloon-free long-term fixed debt at reasonable or low rates sometimes welcome inflation as it can cheapen their debt relative to their potential increased appreciation and cash flow from inflation. I believe this is a gross oversimplification of the situation at hand. There are some additional variables that must be accounted for.

Increased Repair Costs

Not long ago I was needing some work done on a property near Saint Louis. I don't have much in that area so I went on Google and typed in "Handyman Saint Louis". I called 5 or 6 numbers and found that for just 8 hours of labor for one worker for the day I would be charged anywhere from $600-$1,100. At that, most contractors were booked out pretty far. When I started my real estate investing career 10 years ago, I could easily find handymen for $10-$25 per hour depending on skill level. Luckily I was able to find someone through one of my local area contacts that was more affordable, but this got me thinking about how much renovation budgets have skyrocketed in the past 10 years. There seems to be an ever-decreasing number of people with hands-on skills in the trades, which is a bigger issue than I'll be covering here. Almost all of my real estate friends complain that it's getting more and more difficult to find affordable contractors who do quality work. Even if you do manage to find reasonably priced help, you may get sticker shock when you start getting the materials bills. I actually think material prices have increased far less than labor but that's not saying much. 10 years ago I was able to do cosmetic rental house renovations for around 10k-30k depending on the scope of work. I would have to spend closer to 75k-100k for that same work today. Nowadays I'm lucky to get a kitchen done for what I used to spend on a whole house.

Legislative Threats

Legislative threats like rent controls, city governments balancing their budgets on the backs of landlords by charging things like city pension fees to property owners (Peoria, Illinois), increased local regulations such as licensing requirements/fees and increasingly strict code enforcement along with taxpayer funded "nonprofit" anti-eviction attorneys waiting in eviction courtrooms to give free legal aid to mostly undeserving tenants in hopes of finding some technicality by which to get their eviction delayed are just some of the ways landlords are losing in today's climate. If you can even find an affordable attorney who is competent enough to litigate for you, you may get sticker shock when you see legal bills in the tens of thousands for routine procedures such as foreclosures, and almost none of my landlord friends ever go after money due them from evictions because those tenants are rarely collectible and the cost of enforcing judgements by way of garnishments are generally cost prohibitive.

Rents Aren't Keeping Up

For someone to purchase an entry-level condo in my area of Florida, about the cheapest price for a 2 bedroom that most would find livable is $150k. Between property taxes, HOA dues, and insurance you're looking at around $750/mo and that's before any special assessments, repairs, or the mortgage payment. Once you add in an $800 dollar mortgage payment, you're up in the $1,550 range and that's still before repairs and special assessments, and that's after you come up with the $30,000 down payment. Similar quality units typically rent for $1200-$1500 range, which seems to be about what people in this tax bracket are able to afford. According to USAfacts.org about 1/3 of US households make less than $50,000 annually, before taxes are taken out. It's difficult to imagine people being able to allocate more than half of their take-home pay for rent. I think this is why the rents just aren't keeping up with the home prices, which are just now starting to stagnate on a national level.

Property taxes, insurance, utility bills

While these fixed costs may not have inflated quite to the degree that contractor labor has, they have still gone up drastically in recent years.

Financing costs

Even if you buy the property in cash, mortgage rates will still affect your resale price as most people will need to obtain financing. If rates go up, demand will go down, and prices will fall.

Conclusion

While the home prices may be able to keep up with or even outpace inflation, the operating costs may bury you before you're able to realize that appreciation. Landlords are getting squeezed from every direction, and it's most of them I talk to. The ones who seem to scratch out a living are the ones managing their own properties and doing all their own maintenance. That then means that in order to make the investment work they must value their time near zero. I have found some exceptions to this in specialty use i.e. short term rentals and some choice areas.