With inflation remaining a key concern for Australian investors, many Aussies are asking the same question:
is property or ETFs the better investment during periods of rising inflation?
It’s an understandable question. Inflation affects everything from grocery bills to mortgage repayments, and it also has a significant impact on investment returns. But while many people assume there is a clear winner, the reality is more nuanced.
Property and shares can both provide protection against inflation over the long term, but they respond very differently in the short term. Understanding those differences can help investors make better decisions and avoid reacting emotionally when markets become volatile.
How does inflation affect investments?
Inflation is the rate at which the prices of goods and services increase over time. When inflation rises, the purchasing power of money falls.
To bring inflation under control, central banks such as the Reserve Bank of Australia often raise interest rates. Higher rates make borrowing more expensive, slow economic activity and can influence the performance of almost every asset class.
For investors, inflation itself is only part of the story. The combination of rising inflation and higher interest rates is what often drives changes in property values, share prices and overall investment returns.
How inflation affects property
Property is commonly described as an inflation hedge. Over long periods, this has generally been true.
As prices rise across the economy, rents tend to increase and property values often grow alongside inflation. This can help property owners preserve the real value of their assets.
However, the short-term picture is often very different.
When inflation rises rapidly, interest rates usually follow. Higher interest rates increase mortgage repayments and reduce borrowing capacity for prospective buyers. As a result, fewer people can afford to purchase property, which can reduce demand and place downward pressure on prices.
This is why property can sometimes struggle during periods of sharply rising rates, even while inflation remains high.
A good example was Australia’s property market during the RBA’s rate-hiking cycle in 2022 and 2023. Despite elevated inflation, many property markets experienced falling prices as borrowing costs increased and affordability deteriorated.
For property investors, this creates a balancing act. Rising rents may support income, but capital growth can slow or even reverse when interest rates rise quickly.
How inflation affects ETFs and shares
The relationship between inflation and shares is more complex because different sectors respond in different ways.
Some companies have strong pricing power. These businesses can pass higher costs on to customers without significantly reducing demand. As a result, their profits may remain resilient during inflationary periods.
Other sectors can benefit directly from inflation. Energy and materials companies, for example, often experience stronger revenues when commodity prices rise. This is one reason resource stocks have historically performed well during some inflationary environments.
On the other hand, growth-oriented sectors such as technology can face greater challenges. Higher interest rates reduce the present value of future earnings, which can lead investors to pay lower valuations for fast-growing companies.
This divergence explains why inflationary periods often create very different outcomes across the share market. While some sectors thrive, others struggle.
For investors holding broad market ETFs, this diversification can be an advantage. Rather than trying to predict which sectors will outperform, diversified ETFs provide exposure to both the winners and the losers, reducing the risk of betting on a single outcome.
Property vs ETFs during inflation: Which performs better?
There is no universal winner.
Property may provide strong long-term inflation protection through rising rents and asset values, but it can be vulnerable to higher interest rates in the short term.
Shares can also offer inflation protection, particularly through companies with pricing power and sectors linked to commodities. However, certain industries may experience significant declines when rates rise.
The answer often depends on the specific inflationary environment, the speed at which interest rates increase and the sectors or property markets involved.
This is why historical comparisons between property and shares during inflation often produce mixed results. Different periods create different winners.
Why diversification matters more than prediction
One of the biggest mistakes investors make during periods of high inflation is trying to identify a single asset class that will outperform.
The challenge is that inflation doesn’t affect every investment in the same way. Even within property and shares, there are winners and losers.
Rather than attempting to predict exactly which asset class will perform best, many investors are better served by building a diversified portfolio that can withstand a range of economic conditions.
Diversification allows investors to benefit from opportunities across multiple asset classes while reducing reliance on any single investment outcome.
In summary
Inflation has a significant impact on both property and ETFs, but not always in the way investors expect.
Property can provide valuable inflation protection over the long term, yet rising interest rates can create short-term challenges for prices and affordability. Shares and ETFs can also perform well during inflation, particularly when they provide exposure to sectors that benefit from higher prices and companies with strong pricing power.
Rather than viewing inflation as a battle between property and ETFs, investors should focus on building a diversified portfolio designed to weather different market environments.
Because in investing, long-term success rarely comes from picking a single winner. It comes from staying diversified, staying invested and maintaining a long-term perspective.
FAQs
Are ETFs good during inflation?
ETFs can perform well during inflation depending on the companies and sectors they hold. Diversified ETFs often include businesses that benefit from inflation, such as energy, materials and companies with strong pricing power.
Does inflation increase property prices?
Over the long term, inflation can contribute to higher property prices and rents. However, rising interest rates often accompany inflation and can reduce borrowing capacity, which may put pressure on property prices in the short term.
Is property a hedge against inflation?
Property is often considered an inflation hedge because rents and property values tend to rise over time. However, higher interest rates can negatively affect property values during inflationary periods, and property does not always protect investors from inflation in the short term.
What investments perform best during inflation?
There is no single investment that always performs best during inflation. Different assets perform differently depending on the economic environment. Diversified portfolios that include a mix of asset classes are often better positioned to manage inflation risk.
Should I invest in property or ETFs during inflation?
The choice depends on your goals, risk tolerance, investment horizon and existing portfolio. Many investors use ETFs to gain diversified exposure across industries and markets rather than relying on a single asset class.
