Is real estate a good investment during times of inflation?

Inflation - It's a term we hear often when people talk about the economy. But what does it actually mean for you, and how can real estate investing be an effective way to hedge against it?

What is Inflation?

In simple terms, inflation can be defined as a general increase in prices and fall in the “purchasing value of money”.

When inflation rises, the value of your money goes down and you need more money to buy the same items. Essentially, your money doesn't go as far as it used to.

How is Inflation Measured?

Economists use the Consumer Price Index including owner occupiers’ housing costs (CPIH) as a lead measure to track inflation. This index measures the average change in prices for a ‘basket’ of goods and services over time.

A real-world example: The price of bread over time

One simple way to visualise inflation is by looking at the cost of everyday items. Below is an example showing how the price of an 800g loaf of bread has increased from 1971 to 2025:

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This shows how inflation gradually raises the cost of goods over time. If you had £1 in 1971, you could buy 10 loaves of bread, but in 2025, that same £1 wouldn’t even buy one full loaf.

If you had £100 saved in the bank a year ago, it won't buy as much today because of inflation. You are likely to have felt the effects of this, often by realising how expensive most items have become in recent years, whilst wages have certainly not increased in the same way! 

For more information on inflation and its impact on your savings, check out our previous blog.

The UK Inflation Crisis

So now the question is: what causes inflation?

In the wake of Brexit, Covid-19 and the conflict in Ukraine, the UK economy has faced volatility. In December 2022, the UK inflation rate saw a drastic rise to 9.4%, which means the average cost of all items increased by nearly 10% as compared to December 2021.

Key events that shaped the UK inflation crisis

See the infographic below for a timeline of major events in the recent years that have driven inflation in the UK:

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Why is the UK so vulnerable to inflation? 

One major issue is that as a country, the UK relies heavily on imports, meaning that we can’t fully produce our own food, supply our own gas, manufacture our own furniture etc. at a competitive price. Instead, the UK depends on bringing in these goods from Europe and other regions. 

So when Brexit, the lockdown and the sanctions on Russia happened, a lot of goods transportation were banned. You can see how this shortage of supply might have driven up prices because it was unable to meet the demand and as a result caused high inflation in the UK. 

More importantly, this will always be a risk to the UK for as long as it continues to be an importing country, which means that it is essential for you to find methods to protect your money against inflation.

The Challenges for Muslim Investors

To beat inflation, there’s only one answer: your money needs to earn a return higher than inflation. 

There are a number of ways to earn a return: whether through interest, rental income, profits from trading or investing. 

But for Muslim investors, not all options are Halal. 

For example, conventional savings accounts operate with interest and for Muslims, earning interest (Riba) is strictly prohibited.

The Qur'an states, "O believers! Fear Allah, and give up outstanding interest if you are ˹true˺ believers" (2:278).

This means that Muslims need alternative ways to protect their savings from inflation. 

One option is investing, which can be a good opportunity to beat inflation as long as you are able to invest in a Shariah-compliant manner. By investing the money you save, you can buy shares in a company, a house or other commodities. This allows you to potentially earn a return if the value of these assets increases. 

Whilst stocks and shares are good investments, they carry higher risks, subject to market fluctuations and other factors. Although the potential returns can be high, the associated risks are also higher. 

Real estate, on the other hand, is less subject to market forces as it is more of an income-generating asset. Real estate generally operates on a slow but steady, gradual increase in value. 

Real estate is an attractive form of alternative investment and is potentially a simpler and safer way to beat inflation in a Halal manner.

How Does Inflation Affect Real Estate?

Housing prices growth

The real estate prices in the UK have increased significantly over the last 50 years. 

Why is that? Well, in the 21st century, a growing number of people are earning enough to buy their own property. But what hasn’t changed is the land to build them. 

Fun fact: The global population has increased by almost 5 times since 1900, yet the land available to build houses on has not!

Moreover, real estate is a notoriously slow business, where houses take 6 months to build on average, and once you own a house, you are unlikely to move to a new place. With the sky-high demand nowadays, the supply of housing has been unable to keep up, which has contributed to a housing shortage, pushing up demand and prices.

Furthermore, inflation generally drives up the prices of all commodities, including the raw materials needed for construction. As the cost of materials like lumber and steel rises, so does the expense of building new homes—a cost that’s typically passed on to the buyers. 

Change in house prices vs. inflation

As exhibited in the graph above, it is quite evident that the UK housing prices have generally performed better than the inflation in the long run, despite the short-term fluctuations.

The real estate market has experienced a few dips in growth, most noticeably in 2008 and 2023. The first instance was of course the 2008/9 financial crisis, and the second was the recent 2023 inflation crisis. 

Apart from these significant dips, in recent history, the real estate market has consistently matched or exceeded inflation rates over the years, with a peak difference of 23.6% in December 2002.

In early 2024, we saw a dip in housing prices, with price changes falling below inflation by 3.8% as of March. While this may have seemed concerning at the time, history has shown that housing prices tend to recover from such downturns. True to this pattern, we are now witnessing a recovery. As of December 2024, housing prices have bounced back, rising above inflation by 0.5%. After a downcycle that began in December 2022, the market is showing signs of renewed growth.

These shifts highlight the cyclical nature of real estate and the opportunities that arise during downturns. Those who invested during the dip are now seeing the early rewards of market recovery.

To help you understand this, we’re including a graph on UK average house prices below:

If you had purchased a property during the financial crisis in March 2009, since the average house prices have increased from £143,428 to £268,178, you would have achieved a 4.0% annualised return on your investment, compared to the 2.7% average inflation rate since March 2009. This means that real estate prices have outperformed inflation by an average of 1.3% on a yearly basis since 2009. 

House prices in the last two decades have significantly increased and are expected to continue doing so, making real estate a potentially great investment tool to outpace inflation.

Rental income

A feature that stands out about the real estate market is rental income. When a tenant agrees to rent your property at a fixed rate, it provides an assured and passive income source, which isn’t readily available with other investment methods. 

When the inflation rate is high, the rental market usually tends to follow suit, but with a noticeable lag. This is usually because of the fixed lease agreements for a certain time period. For example, if the inflation rate suddenly increases, the landlords won’t be able to increase the rent instantly due to the fixed agreements. However, usually within a one-to three-year period, you can see some rental adjustment based on the CPIH index. 

Over the past 50 years, the relationship between rent and inflation has shown a correlation of 0.6 (a 1.0 would mean that both move perfectly together).

From 2011 to 2024, an increase in rent prices have outpaced inflation by an average of 0.49% annually. 

Looking at a broader historical perspective, the gap is even more pronounced. From 1989 to 2023, rent prices have grown at an average annual rate of 3.71%, while inflation has averaged 2.8%—a difference of 0.91%, nearly double the recent trend.

No doubt, there have been times when inflation exceeded rental prices; however, the overall trend shows that rent prices tend to beat inflation in the long run. 

How Can Real Estate Protect You from Inflation?

Let’s compare what would’ve happened if you had invested £100 in real estate vs. if you left it in a bank (current account) in the year 2000. 

For your investment in a UK property, the value would have increased to £310 – a growth of almost 211%, and this does not include the rental income received over the years.

On the other hand, if you had simply saved your money with a current account, the value of those £100 would have dropped to £54.95 by now. That’s a loss of about 45% of its value.

This should make you realise how important it is to grow your wealth, instead of saving it. The money you worked so hard for 25 years ago has lost much of its value today. Without investing it, you’re essentially wasting your efforts to build wealth.

Some Other Benefits of Real Estate

Tangible asset

Unlike many other financial assets, real estate is tangible, meaning that it has inherent value. Housing is used by people to eat, sleep, pray and more, so it will always hold value regardless of the market conditions. This means that in times of economic instability, real estate is often one of the few asset classes that is not as drastically affected.

Diversification

Since real estate is a different market to stocks and other investments, it makes it a great way to lower your overall investment risk when your other investments are not doing well as real estate is not co-related to other investment vehicles. Especially during inflation, stocks and other financial instruments are likely to fall in value, unlike real estate.

Tangible improvements

Along with being tangible, housing can be improved in value with renovations and refurbishments. These improvements can increase the value of the property by an additional 3-15% depending on the nature of upgrades.

Why Wahed?

We strive to acquire properties at below-market prices with the help of our network of real estate specialists. By doing this, we aim to ensure that your investment is protected against any potential downturns or inflation.

For example, for a property with a market value of £550,000, Wahed might secure it for £500,000 and pass the £50,000 discount (a 9% discount) on to our investors. So, even in the rare event of inflation rising by up to 8% or the real estate market dropping by 5%, the cushion provided by the discount could mean that your investment will be protected against inflation. Though it’s not a guarantee, it does offer some protection in fluctuating economic conditions.

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