Gold vs Real Estate during the Covid-19 crisis

In times of crisis, investors often wonder which investment is safer between gold and real estate. The Covid crisis is very different from the previous global financial crisis, and this choice needs further reflection.

Choosing between gold and real estate depends on many factors, but we will only analyze those strictly related to the Covid-19 crisis in this article. 

The economic and financial situation at the time of writing this article (end of August 2021) is unbelievable. The United States stock market is high and continues to rise; many analysts are alarmed by an impending inflationary phase and by the rise in interest rates.

In inflation, gold and real estate are both considered haven investments, but with the Covid factor, they are not equally safe.

Related article: Inflation and real estate: should you buy a home?

Public debt has risen enormously to address the crisis in the short term but will have long-term consequences. Entire economic sectors have been brought to their knees, and it is still difficult to calculate the damage.

Our way of life and our habits could have changed forever, with obvious economic and financial implications. Meanwhile, the S&P500 continues to rise as if we were experiencing the most significant economic renaissance ever.

Related article: Thoughts on COVID-19 Global Financial Management

Remote working has revolutionized entire industries and destroyed businesses that lived on the services provided to workers. Commercial real estate seems not to have been affected by the emptying of offices, but how is this possible?

It could all return to normal in a short time or not; no one can currently answer. Alarming news about new variants follows one another with reassurances on the validity of vaccines. 

The price of gold has risen like other precious metals as a result of inflationary expectations. All commodities rose, and this also caused the cost of the real estate sector to grow.

Work from home and price of commercial real estate

Covid has undoubtedly changed the way of working by favoring remote work. Many people have gotten used to working from home, and the world has split into two groups. Some like to work from home and don’t want to go back to the office in the post-covid-19 world; others hate working alone.

 is working from home here to stay after covid-19 crisis
Image from Statista: Link

Companies are adapting, and it seems they are changing the relationship with their employees in the long term. Remote work could continue even after the coronavirus pandemic. This should have a significant impact on the commercial real estate sector.

Companies will need much less space and reduce their future real estate investments. Rents are expected to fall, and therefore the profitability of many REITs may decline. At the same time, residential real estate could experience a sharp increase in requests for more spacious properties. 

A large part of commercial real estate is occupied by companies that provide services to workers in large cities. Think about how many restaurants or other services have seen their customers decline since working from home.

Related Article: Commercial Real Estate as a hedge against inflation

Work from home will have no impact on the price of gold, but how can it not affect commercial real estate? Currently, the sector is not affected by the covid-19 pandemic crisis, but central banks currently drug the markets. What will happen when government aid cuts and central banks start tapering?

An economic contraction in the post-covid is very likely; this will undoubtedly affect real estate prices which are currently very high. 

Buying a precious metal like gold protects you from both stock market crashes and economic recessions. 

Rising public debt, gold vs. real estate

The previous financial crisis of 2007 and mainly related to real estate, was resolved by lowering interest rates and introducing liquidity into the market.

From 2007 to today, rates have remained low, and liquidity has continued to flood the markets; we were indeed close to the beginning of the tapering by the Fed and the other central banks.

The Covid-19 pandemic has probably disrupted every plan of central bankers. Governments worldwide have intervened heavily with state aid, causing the public debt to rise enormously.

When does huge public debt affect the price of real estate and gold in the long run?  As public debt increases, interest rates will inevitably have to rise for two apparent reasons. 

The first reason is inflation; the more money is put into the market, the more inflation goes up. When inflation rises above a certain threshold, central banks have to raise interest rates to keep it in check. The second reason is that when public debt increases too much about the gross domestic product, government bonds become less reliable, and interest rates rise accordingly.

The rise in interest rates raises the prices of mortgages to buy homes and damages the housing market. Therefore, if the price of real estate tends to rise thanks to inflation, there is a decline due to the rise in rates.

average sales prices of new home sold in the united states
Image from Statista: Link

The fall is not generalized. Some properties in certain areas will keep their value intact. At the same time, many will not buy a home and will have to rent one, generating cash flow for the owners. 

The price of gold is also affected by rising interest rates. When evaluating a gold investment, it is often compared to bond investment.

Related article: Protect savings during a crisis: Physical Gold vs. T-Bond

Gold does not produce a monthly return; it is a haven asset that should protect against inflation and economic loss. Real estate and the bond market, on the other hand, produce a constant monthly or annual passive income.

When the T-bond has an attractive yield, it is preferred to invest precisely in gold for yield reasons. Even with very high government debt, the US T-bond will be safe and preferred over gold.

Conclusions

Covid-19 is creating enormous uncertainty, and it is impossible to assess all the consequences of the economic crisis. What will make a difference in the choice will mainly be choosing between an asset that will generate income versus a simple haven asset.

Differentiation is always significant, and both of these investments should have a percentage of their portfolio in both sectors. The effect seems to be inevitable, and therefore protection is required.

Financial markets are highly correlated with the choices of central banks. An investment in gold will always have to be valued by comparing it to the purchase of a T-bond. The comparison with the T-bond should also be applied by examining the real estate market.

It is possible to invest in gold or real estate by purchasing physical assets or through financial instruments. There are financial instruments that allow you to buy physical gold without holding it. These instruments follow the price of physical gold and are not directly affected by a possible collapse of the financial markets.

Equity securities, so-called REITs for investing in real estate, on the other hand, are significantly correlated with the global stock market. These shares are contained within different baskets and held by mutual funds if a RE sell-off price could occur, even in the absence of a real estate market crash.

REITs, therefore, could be much more volatile than gold and infinitely less secure than a T-bond.

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