MY PROPERTY VIEW – THE EFFECTS OF INFLATION ON PROPERTY
Hatched by Justin Clarke on Monday, February 1, 2010
Loading ...
The beginning of a new year is a time to plan and to think about how we are going to look after our cash and build wealth and security. In this decade many ordinary people have become extremely rich from the appreciation in the value of their homes and investment properties. Even considering the recent recession, property has been good bet over the last nine years.
I have a strong bias toward property as an investment class, but let me give you my opinion of where we are and what the future holds.
Interest rates have dropped by 5% to a prime of 10.5%, but still the economy is flat with very low growth projected for the balance of the year. Rates would have dropped further but with inflation stubbornly still holding its ground (now just over 6%). Average house prices are similarly predicted to move slowly forward at around 6%-7%, that is not much faster than inflation.
But what of the medium term?
Inflation is caused by many factors but in our case two big issues keep the economy locked down. We have huge inefficiencies in government and the Parastatals and at the same time any increase in the cost of oil affects almost all input costs. Government, now firmly in the hands of the OLD left, seem determined to meddle with the Reserve bank to create an environment of lower interest rates and a devalued Rand in order to create a short term stimulus, the result unfortunately higher inflation. We will have to pay for the inefficiencies of the Parastatals and there seems like little chance that Eskom will not get away with their proposed price increases again pushing costs and compounding the inflation problem. The pressure to deliver on promises made to their constituencies will be too great to ignore …so politicians will prevail.
But there is a silver lining – inflation is good for those who are highly geared, and most of you reading this blog will be hocked to the eyeballs. The good news is that prices of everything move upwards, but your borrowings stay the same. Effectively your bond devalues in real terms, while your rental income will go up together with the value of the property.
The new decade will have the same challenges that we have had throughout the ages, but with more people chasing fewer resources, I will again bet on Property….
Categories: Property Investment, Property News
Tags: inflation
Comments (14)
Justin, Agreed inflation is a property investors friend. Not so good for homeowner occupiers as it drives up interest rates and bond repayments.
However for property investors who focus on Buy To Let inflation causes rental income streams to rise..The holy grail.
I am of the view that global inflation will rise drastically over the medium term given all the gov stimulus in the USA and UK and around the globe.
The net result I believe, is that SA will import this inflation add in the factors you mention and I suspect the outlook for high inflation is almost certain.
Right now is a great time to be buying long term cash flow investment property. Inflation is my friend as it pushes up prices of real assets like property as well as rentals.
Indeed the world is awash with cash, and the developed economys are poised for an inflation fire. so you are on the nail … high inflation seems inevitable.
Whats your view on interest rates?
Interest rates.. thats a tricky one ! It all depends if our reserve bank keep on following the policies of inflation targeting or they give in to the left and the trade unions.
I suspect however we are at the bottom of the interest rate cycle and typically when rates are low demand for property is on the increase. This time around demand is not so high and property is seen as out of favor so to speak. I think the old saying of buy when everyone is selling and sell when everyone is buying could not be more appropriate than right now… How long they will stay this low is anyones guess, I suspect that the inflation target band upper limit of 6% may rise and that rates will remain static until year end or early 2011.
For once i agree with the ‘old left’ as you call them. There can be no growth of the cake without increased, exported production, for this a weaker Rand is essential. At the moment the ‘carry trade’, which is basically an opportunistic way to skin situations which are out of balance, is keeping the Rand strong in exchange for liquidity which is only short term invested with banks, if the rand weakens this money will fly away giving added weakness but eventually a more useful balance will be struck. This will, hopefully, encourage more productive investment. I don’t think any of this is negative to property so let’s grow our investments!
good comment Max, so you agree that we will settle on a weaker rand, and that inflation will become a factor in the months ahead?
How can inflation be your friend???
Yes, your property is now at a higher value than previously. But you would pay the inflation percentage more to replace the asset.
Also all goods and services that you require and have to pay for have increased by the inflation percentage.
The only advantage -> If you kept yourself liquid your cash would be devalued by the inflation percentage. But you wouldnt have this problem if you didnt have inflation in the first place.
Hi At, consider this example.
You have R200 000 now, you buy a property worth R1m and bond the R800k shortfall. Your tenant pays R8000 per month now.
After a period inflation has pushed the value of your property to R2m but your bond is still R800k – and your equity has grown to R1.2m. Also your tenant is paying the same proportion of his income, but now this is R16 000 per month.
If you kept your money in cash, even with compounding interest it would have only grown to say R400k?
Inflation can be your friend.
AT..
As Justin has said in his example, but I would add that Inflation wipes out debt.
Remember the last couple of years where a property boom like no other and speculators where chasing short term capital appreciation gains.
However property is a long term investment and most seasoned investors are not looking to sell but are in it for the rental streams these properties bring.
I suspect you are refering to the property called your home. You may think this is an investment however its not its just a home. I just chuckle when agents are trying to sell owner occupier homes as investments. Good sales pitch yes, but not an investment.
Hmmm point taken…
But the example only has merit over a very long term. i.e. @ 6% inflation doubling the value of your asset is going to take a while.
You probably breaking even over the first 10 years with a loan of 800k costing you approx 1,9m after 20 years.
@Brennan yes I agree
Commercial property is the way to go but commercial is very expensive to get into…
Hey AT, don’t be put off, residential investment works! Last year Jaques du Toit (ABSA economist) put out an analysis comparing house prices on average vs all major investment categories and residential property preformed the best over all periods, 5 years, 10, 15 and 20 year periods. If you are a long term player, its hard to go completely wrong ..
On another note completely, why not add a section to your site that is aimed strictly at investors, not home seekers. I have a few great tenanted res props I would like to sell and would like to bypass those looking for a home, is this possible ?
Rich, you should post these on the PP website…we have thousands of investors browsing for opportunities, in fact we have over 100 000 people registered as “investors”. Look at http://www.privateproperty.co.za/selling/
Property as an asset class is a function of leverage, i.e. the extension of credit. To know the movements of the property market is to predict the availability and cost of credit. And as prices rise, so will interst rates, putting a damper on property. If the average property cannot be afforded by the average family, then prices are too high. Property as an investment has had its time in the sun, and in the history of bubbles, when a new bubble is created by the monetary authorities, the money DOES NOT flow back to the previously inflated asset class. Property should be shorted.
PS: inflation has one cause: money crration by the monetary authorities.
PPS: I did see the crash coming, and was out of all property investments by July 2007, in anticipation of the crash.
Good move Dean, I think many did not anticipate the severity and got burned.
I accept your argument but I accept i do always see the cup half full. Ii had a similar view in the early 90’s when property stayed flat for a few years and i was wrong – and it cost me a fortune as I liquidated my portfolio. I can promise you prices of property will run again, maybe not this year but the effect of the market is such that excess stock will be soaked up creating shortfalls, and then before you know it prices are on the rise again. Developers, and builders cannot produce new stock at yesterdays prices, and even the cost of renovations creates a cost push situation in the second hand market.
Ill put money on it…whoops, have done so already?
Add a comment