Was having this discussion on a forum a few days ago, so thought I would have a look back at when the UK last had big inflation to see how this strategy would fare.

Scenario:

It is the end of 1973. The average house price is £9,767 and increasing at 24% per annum. You are worried about inflation and think that property is the best hedge over the next two years. You have a 20k deposit and buy a £100k place. You secure at 2% over base (which averages 11.4% over the period in question)

Property:

Property gains 13.5% over two year period, so you make 13.5k capital gain. The funding costs are around 21.5k, income from rent around 14k, and maintenance/voids/transaction costs around 4k, meaning that you make £10034

Cash:

Assuming you get 2% under base on your 20k savings, you make £3760

Shares:

The FTSE All share started the period at 149.8 and finished at 160.52. I estimate the yield to be 5% giving a return of £3335

Gold:

Gold (denominated in GBP) went from 45.95 to 69.31, giving a return of £6740

So, in this sample size of one, and for this time period, it would appear that property was the best investment. However, a lot of the returns are dependent on rental yield, and if you look at the chart below in the renting section, you will see that yields are massively lower than they were in the 1970s, and housing much more overvalued. So maybe now is not the best time to be looking at this, but in two years time, who knows.......

References:

House prices:

http://www.nationwide.co.uk/hpi/downloads/UK_house_price_since_1952.xls

Rental yield:

http://www.nationwide.co.uk/hpi/historical/Dec_2008.pdf

http://www.ntu.ac.uk/research/school_research/nbs/overview/working_papers/59876.pdf

Base Rate:

FTSE All Share:

http://www.thisislondon.co.uk/standard-business/article-23569535-details/It's+got+so+bad+that+even+the+bears+are+buying/article.do

" From its low point of 146 on 5 January, 1975, the FT 30 share index doubled in six weeks. Well, that was then. As Bolton should also know, that index had fallen by two-thirds from its 1972 peak, and the dividend yield on the All-share index was 10%."

Gold:

RPI:

UPDATE:

After feedback, have decided that ignoring the cost of renting is over simplification, so have added estimated yield from renting the property.

Calculations:

PropertyasInflationHedgeCalcs.xls (17.5 KB)