Unison Investment Management has released a whitepaper analyzing the role inflation plays in long-term investments. The report, “Inflation and Its Impact on Real Estate,” addresses the largest component of inflation (housing), how inflation as a whole is calculated and how changes to Consumer Price Index (CPI) are driven by political considerations rather than an effort towards accurate measure.
For those institutional investors with inflation-sensitive investments, what you do not know about inflation could be hurting your portfolios. Key takeaways from the paper include:
How inflation is measured was fundamentally changed in 1983. The result has been an understatement of inflation. The change altered how the cost of housing is measured.
How housing costs are measured has resulted in lower reported costs for housing than is the case for pensioners and the middle class. Wages and pension benefits are tied to reported CPI, meaning that wages have increased slower than house prices have risen. This has eroded savings for pensioners and the middle class.
Inflation has become a political tool given how dependent US government expenditures are upon changes in inflation. Despite this, it is still considered to be an objective economic measure.
Americans that own homes have benefitted from home price appreciation, which has mitigated the impact of reduced savings. Renters in the United States, however, have experienced negative savings for the past two years and have not benefited from house price appreciation.
“If investments in the U.S. continue to be benchmarked to CPI and inflation, there is a fiduciary obligation to understand how it’s being measured,” said Rayan Rafay, head of portfolio management and COO of Unison Investment Management. “We can’t put our heads in the sand anymore. CPI methodology should not be influenced by elected officials and it has failed to keep up in an age of big data and fast-changing consumer preferences. Outdated, resource intensive techniques still utilized by the BLS result in an incomplete measure of inflation at a time when it is arguably the most important financial metric in the world.”
The 47-page report was conducted by Unison’s internal research team and includes a background on inflation, an abridged history of housing and inflation, a walkthrough on how inflation is calculated, a look at how housing drives inflation, an illustration of the divergent paths of homeowners and renters and a brief explanation of alternative measures for calculating the housing component of inflation.
Unison Investment Management (UIM) is the asset management arm of Unison Home Ownership Investors. UIM is a thought-leader in residential real estate and has developed proprietary systems to assess the characteristics and value of every home in the United States.
Unison is the leading provider of home ownership investments, modernizing home financing through long-term partnerships. Unison works with lenders, regulators and institutional investors to integrate home ownership investing into the U.S. housing finance system. Unison HomeBuyer helps purchasers buy the home they want with less debt and risk, typically by doubling the down payment. The larger down payment makes it easier to qualify for a loan, increases buying power, lowers the monthly payment and/or allows a buyer to reserve cash. Unison HomeOwner provides current homeowners with cash to eliminate debt, remodel, pay for school, invest or as a cash cushion, without the added debt or payments of a home equity loan or HELOC.