Today I got Steve’s latest Newsletter, which contained some wise warnings about the extra care needed in the next few years when selecting property.
I wonder if the future is so scary, though? I started to buy property in 1967 when interest rates were around 8+%. There were oil shocks then (and again in 1973) and inflation was way more than now.
Six years later the property was worth four times what I paid. Another bought in 1973 was worth ten times its initial value nine years later.
These were standouts and in 1974 for example, we were paying 12% interest on our loans, but agents rang all the time saying we should put up our rents.
Now why did property rise like that? Inflation, pure and simple. All through the 70’s, as now, there were acute shortages of labour and materials.
So what are we worrying about now? Inflation and higher interest rates. I can assure anybody that good (even spectacular) gains can be made in a high inflation, high interest environment. We did it and so did anyone else who held property through 1965 to at least 1986. (Wise buyers made money outside these times too, by exercising location and negotiation skills).
There’s nothing like a good round of price inflation to effectively reduce your indebtedness, as your loan becomes a smaller and smaller proportion of your asset value.
There is a view held by some analysts that the US might be working up inflation as a means of reducing the value of its own massive debt. Who knows, but I’m not afraid of it.
What do you think?
when you cut through all the gobbledegook, the underlying story is property goes up on average over time. Just buy well, ensuring you can service it and in the most tax effective manner you can. Try to think ahead of the market as much as you can and buy at a good price or buy a property in a location likely to grow.
People are always speculating that property is about to crash, or the end is nigh, but usually the bottom comes and goes whilst people sit around on their hands dreaming of a cheap smorgasboard of property.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
Unless you are one of the proponents of this end of the boom is different to others, well informed, objective and a long term vision will deliver to those investors solid returns.
The same fundamental rules of investing in property hold true today as they always did and will.
inflation was way more than now.…and the higher inflation justified rapidly increasing house prices. That is why this boom is different to the others (oh, and the ease of credit, the breadth & depth of the ‘property investment as a path to riches’ mentality, the unprecedented levels of household indebtedness etc). House price inflation outstripped inflation year after year, and by big margins (with the exception of 2004 in some areas). This situation must be corrected, either by falling house prices or by high inflation and corresponding high interest rates. In other words, there must be a considerable fall in house prices in real terms.
I agree that investors who are positioned wisely to withstand the difficult years will most likely end up winners at some point in the future. However a fall in real values is not an ideal outlook for new investors or further investment, nor does the inflation scenario bode well for those relying on rent to pay their IP mortgage(s). Despite the debt-eroding benefits of inflation, the best investments will still be those that increase in real value.
In my (not so?) humble opinion, the best time to invest in houses will still be after their prices fall.
Cheers, F.[cowboy2]Page 21 of this PDF compares inflation during this boom to that of 1989.
Here is the accompanying article.I would now like to take you through a number of charts that compare economic developments in the 23 quarters up to September, 2004, with the corresponding period in the lead-up to the recession of 1990-91. The shaded region in the first two charts covers the period from the first to the last of the several quarters in which Australian production fell. I invite you to notice the similarities between the growth paths of the economy in the two periods. The comparisons suggest that all of the main variables that were worrying the macro-economic policy practitioners in the late 1980s, and which were said at the time to have led to the extreme tightening of monetary policy, reveal similar or larger imbalances at present.
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