EMAIL #120 - 16TH MAY 2021 - "IS INFLATION GOOD OR BAD FOR REAL ESTATE?
Last week we explored the topic of inflation and I outlined some of the economic indicators that are pointing towards an increasing inflation rate in Australia over the next few years. Most economists are in agreement about this impending inflationary cycle and are predicting its overriding influence on our economy for several years to come. So, this begs the question “how can we best position ourselves to ride out this period of rising prices and economic expansion?” PS: nothing in this email is investment advice, these are just my personal thoughts and opinions.
“Inflation takes from the ignorant and gives to the well informed”
Rising inflation tends to cause instability in an economy, which generally has a negative effect on businesses and on investment. The best way of hedging against inflation (Hedging is a strategy that tries to limit risks in financial assets) is to invest your money in stable assets and the most stable asset class (other than gold) is residential real estate. For the last 30 years residential property prices have outpaced inflation, as illustrated in the graph below.
“From 2000 to 2020, the cumulative inflation change was 39 per cent compared to a change and increase of 51.8 per cent to the new housing price index. The data showed that the new price housing index tracked above inflation.” The Conversation blog
( A good personal example of house prices increasing over the last 30+ years is the first house I ever bought in Albert Park in 1986 for $110k (and unfortunaetly sold 3 years later), it is unchanged and currently on the market for $2.2m. Note: in the first few years of owning this property the inflation rate hit 18%.)
Any product or resource with a limited supply tends to increase in demand and value during periods of inflation, and good residential real estate is limited in supply (especially land in our bigger cities because they are not making any more of it!) Owning an investment property during a period of inflation is a very solid strategy, because both the property value and the rental return will tend to increase. But the big determinant of how well a property performs is interest rates. At present interest rates are extremely low and demand for residential property is very high. But how long these two drivers remain unchanged is the big question?
The main aim during a period of inflation is stability, so buying or selling a property in the middle of a fiscal growth cycle can be risky. However, it can be a good time to downsize (i.e., sell a big property and buy a smaller one), but a difficult time to upsize due to property prices rising rapidly, as is currently happening. The best strategy is to have a long-term plan and stick to it. Like all economic cycles, inflation will pass.
Thanks for reading,
Stay safe and stick to your plan.