Inflation and Asset Prices

As we are all aware inflation is quite high sitting around 5.1% and interest rates rising.

Much talk about real estate and other asset prices dropping.

Inflation actually causes a positive effect on mortgage holders by causing the real value of the mortgage to drop and by also contributing to increase in the value of the home itself. To add to this the inflation is actually impacting raw materials to build houses and other goods and services to build.

Interest rates are supposedly going to help alleviate the continual rise in house prices by making the amount of money ppl can borrow lower and making their mortgage payments higher.

I think everyone that is solely relying on just the interest rises to keep a lid on RE is not looking at the complete picture. Even if interest rate rises at 2% bring inflation back down to 2.5-3% there are still issues with other investment mediums that still dont look attractive.

Furthermore, RE is just not an investment its a fundamental requirement to human living and a necessity in life. Exponential rents, extremely low vacancies and basic supply and demand with housing I honestly dont think interest rates alone will cause much reversal. It may "slow" the growth but I think it will still grow especially in QLD,SA and possibly WA.

The only reason why I think NSW/VIC is slightly dropping is because we've reached a point that its just too expensive for 90% of ppl to purchase and they just cant get the serviceability so the top end of the market has slowed. I think the lower end of the market will absolutely still continue to grow.

I just think there is so much attention on just rates, so many analysts, forecasters and predictions will be totally wrong yet again. If you seriously think about all the factors I think rates are just a piece of the pie that contribute. We are putting way way too much influence on rates causing assets to drop which in itself cannot at this stage.

I'm trying to be logical here without being skewed. Whats ppl thoughts?

 

Meh, news sites need clicks. Thats how they make money.

how will you make money?

Ignore the noise and ask: what will the grandkids think about my decision to buy / hold / sell property?

 

Yep I know its the news always over exaggerating things. They did that when it was booming, about Covid, about the election and now about interest rates.

I went to a economics forum the other day as part of work and this exact same discussion was being had by some very knowledgeable ppl. They were emphasizing the fact that there are a plethora of other issues at play with rising house prices and that anyone saying interest rates alone will cause a dramatic decrease in value is just an uneducated commentator. That was the general consensus that around 6-7 key speakers were trying to portray.

My family wont be selling anything. My old man has a massive portfolio and he is a very smart guy (if I admit it myself) and I've asked him about it. He is of the same view that rates rising to even 2% will only be a bump on the road and expects pricing to continue to rise at least in-line with inflation which I think is definite.

Too many ppl I think trying to time the market to enter which I never thinks works out well for anything and most likely just comes down to luck.

 

Although I'm cautious of the possibility of volatility in RE prices at the moment, trying to believe that RE prices will drop when inflation on everything else (goods, food, petrol, etc) is going up is just against common sense.

Although some properties are taking longer to sell, or even not selling at their asking price, good properties are still high in demand and even increasing their asking price.

Still trying to decide on whether or not to pull the plunge and enter the market, rather than waiting. Don't want to be caught out believing the news of a possible crash, and only to be priced out of the market by the end of the year...

 

It would also be worth mentioning that inflation only has a positive effect on mortgage holders if inflation is higher than mortgage rates.

An 8% interest rate with 4% inflation won't help.

 

mmmm.... inflation itself doesn't help borrowers. The idea is inflation will help drive wage growth.

Problem is... if inflation is supply cost driven by things outside of Australian economy. Then you are stuck with higher cost of goods and services, higher interest rate and crummy wage.

Crushed on all sides.....

 

The goods going up in price with inflation arent bought with lots of leveraged debt. Maybe a bit on the credit card but not generally. The debt needs to be paid with interest. If interest rates double, a 5 to 10 pct wage increase wont help much to bridge the gap. Thats where the concern is.