Is Pacific Heights Real Estate Inflation-Proof?

Pacific Heights is among the most desirable neighborhoods, and my personal favorite neighborhood, in San Francisco, well-known for its stunning architecture, panoramic City and Bay views, and proximity to popular shopping and dining destinations, including multiple Michelin-star restaurants. Over the years, homes there have undoubtedly appreciated, and the area has become a hotbed for well-to-do tech and finance executives, high-powered attorneys, world-renowned authors and, of course, investors.

Investing in real estate has long been considered a reliable way to grow wealth and, in uncertain economic times like today, investors often seek assets that can protect or hedge against inflation as much as possible.  As the City’s infrastructure ages and the area becomes more popular among those looking for major renovation and investment projects, a question many people ask more and more in today’s economic environment is whether Pacific Heights real estate is “inflation proof.”

Of course, no investments can be truly immune to the macro-economic environment in perpetuity under any and all variable scenarios. But we can look to historical performance and supply and demand in the region and determine whether investing in that area has been relatively “inflation proof” historically and make educated predictions about the future of Pacific Heights real estate.

Pacific Heights has a tried-and-true track record of not only maintaining property values, but delivering consistent returns on investment over prolonged periods that far outweigh the pace of inflation.

In the past decade alone, median sale prices for all property types in the neighborhood have increased from just shy of $1.25 million to over $1.73 million (nearly 40%).

 

And median price per foot over that same time frame has increased from $831 to $1,179 (nearly 42%). 

 

Over that time frame, core inflation averaged about 2.7% per year, which translates to an inflation total of approximately 30.57%. In other words, the value of Pacific Heights real estate over time (at least as measured by median sale prices and median sale prices on a per foot basis) has substantially outpaced inflation.

So, historically, Pacific Heights real estate appears to have been an effective inflation hedge. But why has that been the case and why do I believe that is likely to be the case going forward? It comes down to a few critical factors: location; supply and demand; infrastructure.

Everyone knows the phrase, “location, location, location.”  Location is perhaps the most important factor of all in determining the value and trajectory of any piece of real estate. Properties located in prestigious, highly desirable areas, such as those in close proximity to thriving restaurant scenes, great schools, weekend destinations, airports and other major amenities, tend to retain value better during periods of economic uncertainty. This is because people will consistently need or want to live and work in or near these locations, despite any unfavorable economic conditions.

Considering that Pacific Heights is one of the most sought-after and desirable neighborhoods in all of the Bay Area–not just San Francisco–it certainly checks the location box. Its proximity to downtown San Francisco, Presidio National Park, Golden Gate Park, and the dining and shopping scenes of Sacramento, Fillmore, Chestnut and Union Streets, promise everlasting appeal for future buyers.  Combine the relatively convenient location with the seclusion, exclusivity and panoramic views associated with living in Pacific Heights, it is no surprise homes aligning the tree-lined streets in the area are among the most sought-after and can weather inflationary pressures. 

A fundamental underpinning of any economic market, especially the housing market, is supply and demand. When existing demand outweighs existing supply, prices tend to increase. On the other hand, when supply turns the tables and overtakes demand, prices tend to decrease.

The supply of real estate in Pacific Heights is relatively limited compared to other markets, in part because of geographical constraints–such as steep slopes–and regulations designed to maximize preservation of historical architecture. These constraints make new development in the area rare, bolstering the value of existing properties over time. Combine the rarity of new development with the seemingly ever-present demand from high-income individuals (in Pacific Heights, the average household income is $176,573), property values in the neighborhood should act as an effective inflation hedge.

As of the writing of this article, monthly supply of housing in Pacific Heights is under three months. This means that if no new inventory came onto the market, it would take less than three months for all existing housing inventory in Pacific Heights to sell out. A “normal” market–one that is relatively balanced between buyers and sellers–is typically between 4 to 5 months of supply. A “buyers” market–one that weighs in favor of buyers–is typically at least 6 months of supply. In Pacific Heights’ case, we have a “sellers” market – meaning market dynamics overall favor sellers, which has, over time, bolstered home prices in the neighborhood.

Infrastructure in the area also impacts property values. Cities and neighborhoods with solid infrastructure, such as convenient access to highways, public transportation, and major airports, tend to maintain higher value during inflationary times. People are willing to invest in a location that affords them convenience and accessibility, while properties in areas with less than acceptable infrastructure tend to decrease in value.

Living in Pacific Heights means being close to major arteries of transportation, like the Golden Gate Bridge and two international airports. The area is also highly pedestrian-and cyclist-friendly, making it even easier to get around with alternative means of transportation.

It’s no secret that interest rates have an incredible impact on the demand for real estate and are directly tied to inflation. During times with low interest rates, it is easier for people to obtain mortgages, which contributes to increased demand for real estate. However, when interest rates climb back up, people are less inclined to invest in homes, and demand drops. During inflationary periods, interest rates do tend to creep up, which has a negative effect on demand. However, in highly desirable neighborhoods like Pacific Heights, the level of demand remains comparatively strong, even despite increasing interest rates.

This is in part because higher-net-worth individuals who live in areas like Pacific Heights are less impacted by day-to-day fluctuations in interest rates than the broader market participants. A buyer with a net worth of $100,000,000 may be willing to pay cash for an $8,000,000 home, and not care about high borrowing costs at all. And even if that same buyer wanted to obtain a loan, chances are that buyer could obtain a mortgage rate substantially lower than the average rate available on the open market. Indeed, several clients I work with are lawyers at large law firms with access to mortgages with average rates of 1.5 to 2.25% lower than the prevailing average rate.

While no investment can guarantee complete immunity to inflation, Pacific Heights real estate has demonstrated qualities that make it an appealing choice for investors seeking protection against rising prices. Its historical performance, desirable location, limited supply, and resilience during economic downturns position Pacific Heights as a neighborhood with the potential for long-term value appreciation. However, as with any investment, thorough research and consultation with a real estate professional are essential to make informed decisions based on individual circumstances and financial goals.

If you’re interested in an area like Pacific Heights, you should prioritize working with an experienced real estate agent who can offer expert local guidance on current market conditions and predictions. I’ve lived in Pacific Heights for several years and know the neighborhood as well as anybody in the City. And more than that, I care about property values in my neighborhood and how we can best preserve those values going forward. If you’re ready to make a move and strengthen your portfolio with prime Pacific Heights real estate, reach out to me!