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Posts Tagged ‘Inflation’
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Controlling inflation is going to be a nightmare for governments and central banks over the next 5 years, especially if it happens when interest rates are still low.
Inflation can be a bit like a drunken visitor - once you let them into your house it´s very hard to get rid of them. If you´ll forgive the extension of a crude pun, the drunks will be banging on a lot of doors soon.
China, India and Brazil are already battling with inflation as is Britain. The jury is still out on the USA in the short term, but I think higher inflation is inevitable. You´ll find all manner of predictions (from wildly optimistic to doomsday) on the internet regarding the course of US inflation once the Fed Reserve starts to unwind it´s gargantuan quantitative easing program.
Inflation: Winners and losers On the one hand, high inflation can cause a lot of damage to people holding (non commodity) stocks, government bonds, variable rate mortgages, bank deposits and unprotected pensions. A huge amount of people fall into his category.
On the other hand, you don´t need to be Paul Volcker (famous US central banker who tamed inflation in the 80s) to know that the higher the rate of inflation, the more expensive everything will become. That includes property prices and rental rates.
To clarify - if inflation is high, the value of your property will increase and the rent tenants pay to their landlords will increase. Looking at figures for the last 40 years (i.e. not just the recent boom), property prices have consistently outpaced the rate of inflation. |
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(Note: NCREIF is an index of properties owned by pension funds & NAREIT is an index of publicly traded real estate investment trusts)
Regards
Colin |
For people that purchased property in the USA between 2003-2007 it´s been a pretty disastrous 3 years. Don´t think anybody will disagree with that.
What about the people that bought in 1980 or 1990 or 2000? As the chart below illustrates, they are looking just fine. The red line is property prices adjusted for inflation every year and the blue line is average property prices in each of those years.
What about the people purchasing today at the 2001 prices? Where will they be in 10, 20 or 30 years?
Buying at historical lows means the rental yields will be high and once financing becomes available the supply of buyers (and property prices) will increase dramatically. If you purchase in 2010 at 2001 prices and sell in 2015 at 2005 prices, you´ve more than doubled your money.
However, the longer term view will depend a lot on interest rates and inflation too.
Unlike the Greeks, the US government can inflate its way out of trouble. Whatever your opinion is of the US debt (53% of GDP by the way), it´s ability to borrow is greater than any other country on the planet thanks to the unique status of the dollar.
Borrowing levels will have to stabilise though, and although there are lots of ways of doing that (some painful, others problematic) inflation is going to be a side effect.
If inflation does take hold in the US, that means interest rates will go up, which means higher mortgage payments for people. That´s not good if you have a mortgage.
Historically, that has also lead to higher rents.
It has also led to higher property prices.
So where will that leave the proud owners of distressed Florida properties with no mortgages in solid locations with steady renters?
Laughing probably, all the way to the bank.
Kind Regards
Colin Murphy
