This study analyzes the effectiveness of property investment in hedging against inflation. Pooled Estimated Generalized Least Square (EGLS with cross-section weights) models are used to determine whether investing in property is a good hedge against inflation. In this model, the total pool (unbalanced) observations considered are 10,431 residential properties. On the whole, this study considers 16 types of properties and 118 housing schemes. Three models are used to determine inflation, expected inflation, and unexpected inflation. The results of the study indicate that the return on residential property is lower than inflation and that it is not a good hedge against inflation. This finding applies only to the location and the types of properties considered in this study. However, in general, it can be concluded that investment in residential properties through buy-and-sell is a better strategy. The results also indicate that there may be other factors affecting the property returns besides inflation.

Real estate investment in the Malaysian property market has gained tremendous popularity and momentum amongst the local and foreign investors. According to the Property Market Report 2006 and the Valuation and Property Services Department (2006), residential market has contributed 83.3% to the overall property market transactions in Malaysia.

Dehesh Alireza and Pugh (1999) have found linkages between the property market and the economic sectors, while Mani (2000) and Royal Institution of Chartered Surveyors (1994) concluded that there are property cycles within the economy. The economic cyclical trend has a tendency of affecting the property sector. To explore further, this study looks into one particular component of the economy, the inflation factor, and its impact on the residential property sector. It is pivotal for investors to know whether investing in property is a hedge against inflation because inflation can lower their investment returns. Therefore, the objective of this study is to identify the ability of the investments in the property market in general and residential property in particular to act as a hedging tool against inflation.

The main idea of investments, particularly property investments, is to invest and let the inflation make the property grow in value, i.e., capital appreciation. The main objective of the study lies in the inflation hedging characteristics of residential property market in Malaysia in the short-term period between the years 2000 and 2006. The hedging properties are analyzed with respect to property type and housing area.

Applied Finance Journal, Property Investments, Inflation Hedging, Real Estate Investments, Residential Markets, Economic Sectors, Inflation Factors, Real Estate Investment Trust, REIT, Monetary Policies, Consumer Price Index, CPI, Residential Property Market, International Real Estate Society, Malaysian Housing Price Index.