Inflation and it's effect on house prices.

There's a bit of growing talk about inflation these days. We're living in strange times economically. Our governments have flooded us all globally with tonnes of cash and cheap money.

Where do we think this will go from here?

I know there's a lot of property bulls on this forum who are wildly optimistic about the future of house prices, but I'm wondering if there are any of you who have thought about what scenarios may come out from this uncertain time other than prices will rise by 30%?

 

the question here ( this time ) is what sort of inflation will it be

A. taxflation, ... fees , charges and taxes rise ( often more than the CPI index )

B. shrinkflation ... the price stays the same but the candy bar shrinks in size , or inferior ingredients are substituted ( or both ) as an example

C. normal inflation .. prices go up

D. or deflation official prices stay the same but supply dries up , so you end up paying higher prices to jump the queue ( think buying physical silver at the moment , up to 100% extra to take your silver coins home the same day as you pay for them )

E...or something else

inflation is basically a reduction in your buying power

all currency relies on trust .. how long will you trust the currency ( and not demand payment in say , US Dollars , gold or sliver , or bitcoin ) and government policy ( a lot of cash rushes to a haven overseas )

so to be cute ... how long is a piece of string

remember this seems to be the era of shifting goalposts

 

Thanks @twisted strategies do you have your two cents worth on where you think we're heading in this era of shifting goal posts?

 

@Daz744677 asset price has been bid up procisely because of devaluation of currencies. Property benefits from inflation in 3 folds for most.

1. Cost of materials and labour goes up, your building will go up in value.

2. Premium land is limited in supply and therefore safe storage of wealth in times of high inflation.

3. If you have debt in your home like most people LVR reduces significantly over time, even if you are not paying any of your principals, your debt will become more and more insignificant in relation to the value of your property.

High inflation might cause some short term pain like hike in interest payment, it will greatly increase its value in relation to the deflated currency.

In the case of hyperinflation, obviously you would wish you don't hold any significant cash at all. Land and gold might well be the best asset type as businesses(shares) are likely to be ****.

 

i am old(er ) this time i can't even tell you if i am standing on shifting sand , quicksand or quicksilver and then there are the posts ..

i lost faith in the financial system after the Greece and Cyprus crises , it is bad enough when YOUR government changes the rules , but international bodies ( no normal citizen can elect or vote against )

gold ( or silver or platinum ) kept VERY close appeals to me , rules and debt loadings are changing too rapidly for me to be anything but super cautious

the entire system runs on trust .. trust you can repay the loan , trust you can keep paying taxes , rates and charges , trust you can swap productivity for goods

now land MIGHT still be good OR a target for extra taxes , by fiscally irresponsible administrators and their pie-in-the-sky projects

Redcliffe Peninsula railway line - Wikipedia

that rail-line was first proposed in 1895 , how would you be if the same happened to your block of land ( much of the land was gazetted for the line DECADES before the first pick was swung )..

say you lived within 50 metres from any major highway ( or future arterial road ) what are the chances ???

 

Interesting you quote the Greece and Cyprus crisis but don’t hold bitcoin. These two events highlight the importance of bitcoin!

 

As mentioned above, inflation helps property returns in multiple ways and why real assets tend to be a good hedge against inflation.

the only real risk from rampant inflation is central banks having to quickly increase interest rates, which would have a substantial impact on long duration assets - land and stocks. However, the inflation itself provides some downside protection here as your income might increase and your debt deflates away in nominal terms. This is the scenario you have to prepare for, where all asset prices fall, but it wouldn’t be that bad.

the other factor is that in order to get high inflation we probably need strong economic growth and high wages growth. These are both positive for property as well.

Therefore, I am less worried about inflation.

the bigger concern is poor economic growth and deflation (which is terrible if you have debt). Think Japan.

 

I think you understate risk of quick rise in iflation. A return to medium term cpi (eg 3pct) could return us to 6 to 8pct mortgage rates, triple current rates. You would need 50 years of 3pct pa pay rises to compensate. Which is why we are stuck in this hole, and the rba solution will be to keep cutting until the economy falls apart .... hopefully on someone elses watch.

 

while i applaud the original intent of bitcoin ( a reward system for the citizens that helped scientific research ) it has become a competitor the Central Banks and governments control of currency and transactions and suggest they with subvert it or find another way to control it ( or crush it )

that is not the fault of the creators of bitcoin , but controlling all popular transaction systems is the mania of governments ( and bankers )

 

there is no doubt that house prices would be much lower at 6-8% interest rates

However 3% inflation is not going to result in any material interest rate rises as it is in the RBA target range. You will need inflation higher than that over a sustained period to create a 6-8% interest rate environment.

it is that level of sustained inflation (and quite likely strong growth) that provides some protection against future interest rate rises.

that was my view and why I was ok to buy in 2020.

However with the recent price rises, I think the risk reward situation is becoming more challenging now

my 2c

 

given the willingness of most Central Banks to cut official rates to near zero ( and even below in some cases ) i see inflation as we normally perceive it ( rising bank rates and CPI ) to be different this time

BUT i still think the buying power of your dollar will be severely diluted , after all QE to infinity and beyond is no longer as funny as it seemed when first uttered as a sarcasm .

if QE for (seemingly ) forever becomes true , what of economies and financial systems ,

normal metrics will become meaningless.

has the global economy already fallen apart ( in September 2019 ) and no authority is willing to admit it .

for real inflation , i would be looking at the costs of goods and services ( and the availability of them at short notice )

now IF traditional inflation returns to an already diluted currency ..watch out previous records could be broken ( in craziness )

 

I'm trying to read between the lines here to get some direction. I guess the general mood I'm getting from @Liquidity and @twisted strategies is caution.

So is now a good time to jump in to real estate or to sit on the sidelines or throw it all at bitcoin or something else? What would you recommend? Cash in the bank?

 

do it 100%! Why not live life fast and furious.

 

Depends on where you're investing. Brisbane for example has not moved in 12 years:

Brisbane Property Market Update - January 2021 [QLD]

After 12 years of inflation, QE, 2% interest rates, and record interstate migration, it would have to take more than a pandemic before I'd say you should tread with caution. Markets within markets.

 

With interest rates at 0% for the next 3-5 years it is hard to sit in cash.

My view is that leveraged property returns will be the best performer over the next 2 years. Once the Interest rates are priced into the market it will stagnate. Therefore a well priced property is probably the best bet. I was lucky to buy last year. Only you can make the call on whether it is well priced or at least not overpriced.

The risk of high inflation resulting in high interest rates is always there, but my assumption here is that they will probably drop back down to 2020 at worst if mortgage rates went back to 4-5% (from 2.5% today). So my downside assumption is prices drop back down to current levels over 5-7 years which is not the end of the world (after this initial boom)...but this has a low probability of happening.

From there I think shares will be better. I think so for two reasons:
1) less sensitive to interest rates due to companies being less leveraged than a property investor
2) Rising interest rates are a sign the global economy is picking up and therefore I would expect company profits to be rising which is a net positive for shares

 

The market I've mostly been looking in has jumped a lot in the last 12 months. Around 10-15%. I'm guessing you would say to tread with caution here?

 

Still no. Spread that 15% over the last 12 years and it's still a whole lot of nothing.

 

Did you advise caution when markets fell in 2018, and then again after lockdowns started in 2019?

 

OK so if cash rate increases come to pass in 2024 - Bill Evans is saying 1.25%, what's will be the impact on the ASX and real estate prices?

 

Problem is…even if say rate rises in 2024 causes property to drop 10%, if it goes up 30% in the next 3 years, how does that help decision making?