@ bardon
It seems to me that those at financial control mechanism of the country prefer inflation to stagnation and god forbid deflation. One can say that as every person act to his personal benefit regardless to his position in society, people in control of our economy are manufacturing 'mild' inflation as a means to support there's own financial affairs.
Based on above, I inclined to think that they will put every effort to maintain inflation. The question remain if the will achieve desired 3-5% range without going far either side of the target. And what are they trying to achieve by returning the budget to surplus, as it somewhat suppresses the inflation and contradicts to the general course.So I agree here with bardon, inflation is a lickly to haunt us in near future. Those with savings sitting in bank accounts will suffer and will be taxed as well.
ummester wrote:It will be alive and kicking until the ineviatable return to long term price vs wage ratios are again met:)Don't count on it!
Then again, either you or I could be right. Take your pick, 50-50 chance!
bardon wrote:Personally speaking I think that due to the unprecedented easing polices of the big boys there is Tsunami of inflation building up.Not necessarily. The trillions in new money created over the last few years is still locked up in bank and central bank deposits. It exists only as digital money at this stage and hasn’t entered the money flow.
Once unleashed monetary value will be debased overnight, savers and pensioners will be punished, prices and wages will rise.
It’s unlikely to be unleashed. The consumer is deleveraging not leveraging up. The new money is stuck on balance sheets as bank reserves to prop up insolvent banks.
Debt levels will not increase and debt repayments will seem like peanuts in comparison to before inflation hit.
Debt levels (soveriegn and bank) will increase. Without debt there is no money. Fractional reserve banking requires the creation of debt (money) or the system collapses. Debt always exceeds money supply (interest component of debt can’t be created/printed).
Hard assets including houses should also inflate in this scenario.
Note necessarily. A crash is a lack of money. Debt disappears through default therefore reducing the money supply. This causes assets to devalue. Governments react by printing hard currency which directly causes inflation. Assets ‘appear’ to rise in price but it’s simply inflation. Your earnings don’t inflate at the same rate so you quickly become poor. Essentials inflate in price while assets deflate.
Inflation always has been a trusty 24/7 servant of a leveraged property investor
You are kidding right! If you aren’t you have no idea of how inflation works or the FIAT currency system.
eroding debt level and increasing asset and rental values.
If your income rises through inflation and your debt stays the same then yes. An asset’s value has to, at the very least, rise at the same rate of inflation just to hold its buying power. Anything less and you are loosing ground. Rents tend to lag inflation and are dominated by market forces.
Inflation is every PI’s enemy.
The Freckle
??????
I thought inflation is a property investors friend.
Inflation means assets, incomes and rents generally rise in value while debt remains the same. How is inflation bad for property investors?
Cheers,
Lukeluke86 wrote:??????I thought inflation is a property investors friend.
Inflation means assets, incomes and rents generally rise in value while debt remains the same. How is inflation bad for property investors?
Cheers,
LukeInflation makes your debt seem smaller compared to your earnings over time. So if you earn $100/wk today and your debt is $100,000 its harder than when your debt has reduced after 10 years and you now earn $200/wk.
Problem is the asset you’re paying off has to appreciate at the same rate or better to hold your buying power from ten years ago. So inflation is just making it easier to pay of the debt over time. Problem is you may actually be getting poorer (loosing buying power through inflation) without realising it.
It’s the problem with property. All things being equal the 2br house you bought 10 years ago will still only buy you a comparable 2 br house today if you sold up and moved.
Higher inflation generally means higher interest rates so you loose from that angle too.
Inflation is not your friend. You do better without it than with.
The Freckle
I still dont understand why you think inflation is bad from a propertys perspective. In ten years time, the debt you have on that house will still be the same. But inflation means that the house is worth much more. Even if it only grows with the rate of inflation, and rents only rise at the rate of inflation, it will be worth much more than ten years ago and the rent will also be much more.
High interest rates combat rampant inflation, and because this generally co-incides with rampant growth of assets, then it is a good thing (assuming you have the ability to meet repayments, which you will if you have the correct structuring).
So all things being equal, inflation is very good for people who own appreciating assets (like property) but bad for people who hold cash or other assets (like bonds) that generally dont increase with inflation.
Cheers,
Luke+1
In simplified form, if you are in debt – inflation is good. That is assuming business, not personal debt.
If you are saver (in fiat currency), inflation is reducing your savings and is bad for you.I have lived thru inflation and hyperinflation in Poland 1990, Russia 1992 and few others. General rule is, as inflation rate increases – more value you loose by holding the fiat over the same period of time. So people/businesses dump currency and buy goods, assets (land, buildings, factories, very large businesses, infrastructure and so on) and start trading barter (in very bad cases, think Greece).
From PI investor with debt point of view, moderate inflation is very welcome. I know as I am and I can count my money well.
Freckle wrote:All things being equal the 2br house you bought 10 years ago will still only buy you a comparable 2 br house today if you sold up and moved. Higher inflation generally means higher interest rates so you loose from that angle too.Hence the term 'investment property'. People who buy such a house already have their own home (or rent with the intention of continuing to rent while investing) and are not looking to sell it and buy ANOTHER house in 10 years time to replace it. They are simply going to sell the investment property and use the profit for whatever they see fit, while continuing to live in their own home or rent for the forseeable future.
The other side of the argument also is that an investment property, researched well, has the potential to create above-average gains compared to a bunch of other property. Location counts. All areas have not experienced the same degree of growth within the last decade.
simple wrote:+1
In simplified form, if you are in debt – inflation is good. That is assuming business, not personal debt.
If you are saver (in fiat currency), inflation is reducing your savings and is bad for you.I have lived thru inflation and hyperinflation in Poland 1990, Russia 1992 and few others. General rule is, as inflation rate increases – more value you loose by holding the fiat over the same period of time. So people/businesses dump currency and buy goods, assets (land, buildings, factories, very large businesses, infrastructure and so on) and start trading barter (in very bad cases, think Greece).
From PI investor with debt point of view, moderate inflation is very welcome. I know as I am and I can count my money well.
The debt is only one part of the equation. Inflation affects the interest rate (cost of debt), the asset (may rise in value), and cost of holding the assets (overhead expenses).
Too much inflation can see depreciation in an asset while costs rise. It’s why central banks try to stabilise inflation at around 2-3%. It makes financial markets far more stable with lower risk.
You can’t look at inflation and any of its affects in isolation; ie its reducing effect on debt alone. In general inflation has wider implications in how it affects markets.
Inflation is part of the financial forces that transfer wealth from you to the banks/govt.
In high inflationary times I agree FIAT is not the place to be. Hard assets can buffer you from the worst affects of inflation but it’s not a guarantee. During the 90’s we saw high inflation high interest rates and then a deflationary crash in RE. My property (NZ) went from $350k to $230k in the space of 8 months.
The Freckle
fWord wrote:and use the profit for whatever they see fit,And that’s the problem with the definition of profit over time. You may have more dollars in your wallet but if the dollars you had 20 years ago bought a dozen eggs and the dollars from the sale still only buy a dozen eggs 20 years later then are you actually any wealthier? Inflation tends to trick people into thinking they’re getting richer.
You need to constantly measure your wealth in terms of buying power not how many zeros are on the end of your bank book.
The Freckle
Freckle wrote:fWord wrote:and use the profit for whatever they see fit,And that’s the problem with the definition of profit over time. You may have more dollars in your wallet but if the dollars you had 20 years ago bought a dozen eggs and the dollars from the sale still only buy a dozen eggs 20 years later then are you actually any wealthier? Inflation tends to trick people into thinking they’re getting richer.
You need to constantly measure your wealth in terms of buying power not how many zeros are on the end of your bank book.
The Freckle
I would disagree.
You buy a house for 500K, rent it out and if properly done brake even, not even considering tax. That at 100% finance, with zerro capital outlay.
Now, in 5 years from now, your loan is still 500K, but tenants pay more (min 3% rent increase/year).
So, you have an income, thank you inflation.Now 20 years down the track, loan is still 500K BUT rent is +3% every year. You take your yearly rent and pay down debt.
Result – you own property, you have rent paid, and you spend NO MONEY in process.If not for inflation, this financial vehicle will not function
simple wrote:I would disagree.
You buy a house for 500K, rent it out and if properly done brake even, not even considering tax. That at 100% finance, with zerro capital outlay.
Now, in 5 years from now, your loan is still 500K, but tenants pay more (min 3% rent increase/year).
So, you have an income, thank you inflation.Now 20 years down the track, loan is still 500K BUT rent is +3% every year. You take your yearly rent and pay down debt.
Result – you own property, you have rent paid, and you spend NO MONEY in process.If not for inflation, this financial vehicle will not function
So income rises with inflation but expenses don’t. With that logic all properties should be positively geared because of inflation over the last 50 years. With that logic income should just keep increasing.
The Freckle
Freckle wrote:simple wrote:+1
In simplified form, if you are in debt – inflation is good. That is assuming business, not personal debt.
If you are saver (in fiat currency), inflation is reducing your savings and is bad for you.I have lived thru inflation and hyperinflation in Poland 1990, Russia 1992 and few others. General rule is, as inflation rate increases – more value you loose by holding the fiat over the same period of time. So people/businesses dump currency and buy goods, assets (land, buildings, factories, very large businesses, infrastructure and so on) and start trading barter (in very bad cases, think Greece).
From PI investor with debt point of view, moderate inflation is very welcome. I know as I am and I can count my money well.
The debt is only one part of the equation. Inflation affects the interest rate (cost of debt), the asset (may rise in value), and cost of holding the assets (overhead expenses).
Too much inflation can see depreciation in an asset while costs rise. It’s why central banks try to stabilise inflation at around 2-3%. It makes financial markets far more stable with lower risk.
You can’t look at inflation and any of its affects in isolation; ie its reducing effect on debt alone. In general inflation has wider implications in how it affects markets.
Inflation is part of the financial forces that transfer wealth from you to the banks/govt.
In high inflationary times I agree FIAT is not the place to be. Hard assets can buffer you from the worst affects of inflation but it’s not a guarantee. During the 90’s we saw high inflation high interest rates and then a deflationary crash in RE. My property (NZ) went from $350k to $230k in the space of 8 months.
The FreckleI agree that during far extremes of inflation/deflation unexpected things happen. But, if the government manage to control it with in the reason, all indicators perform in line with inflation over the mid to long term. Like you mentioned, one extra zerro added to the prices every so many years, to ALL prices. But your bank loan is not indexed, it is still the same original amount.
Asset depreciation: well, it happens with or without inflation. All assets fluctuate in value again each other and to the FIAT as well.
As for wealth transfer, it’s an old story. Do not hold fiat, and you are not a subject to been inflated and taxed out
You may still experience value fluctuation of the asset you hold, say gold / land / PI. But it will never be reduced to zerro like dollars can be.
All asset classes are inflation indexed by nature over the mid-long term, but FIAT is not. It’s unique in this respect.Freckle wrote:simple wrote:I would disagree.
You buy a house for 500K, rent it out and if properly done brake even, not even considering tax. That at 100% finance, with zerro capital outlay.
Now, in 5 years from now, your loan is still 500K, but tenants pay more (min 3% rent increase/year).
So, you have an income, thank you inflation.Now 20 years down the track, loan is still 500K BUT rent is +3% every year. You take your yearly rent and pay down debt.
Result – you own property, you have rent paid, and you spend NO MONEY in process.If not for inflation, this financial vehicle will not function
So income rises with inflation but expenses don’t. With that logic all properties should be positively geared because of inflation over the last 50 years. With that logic income should just keep increasing.
The Freckle
You are correct saying that all you do is just wait out few years and it becomes positive, This is what I do anyway.
But income always the same, it’s not increasing. It’s just the loan amount becomes very small (devaluates).
Income just becomes inflation adjusted. It will buy you the same amount of food now or 20 years later.Freckle wrote:simple wrote:I would disagree. You buy a house for 500K, rent it out and if properly done brake even, not even considering tax. That at 100% finance, with zerro capital outlay. Now, in 5 years from now, your loan is still 500K, but tenants pay more (min 3% rent increase/year). So, you have an income, thank you inflation. Now 20 years down the track, loan is still 500K BUT rent is +3% every year. You take your yearly rent and pay down debt. Result – you own property, you have rent paid, and you spend NO MONEY in process. If not for inflation, this financial vehicle will not functionSo income rises with inflation but expenses don't. With that logic all properties should be positively geared because of inflation over the last 50 years. With that logic income should just keep increasing. The Freckle
If you buy a negatively geared property, then with inflation the property will become positively geared over time. Of course proeprty related expenses will increase with income, but because debt doesnt, the property becomes positively geared.
e.g.
Year 1:
Mortgage Interest (7% of $500k, LVR 80%) – $35 000
Rent (say 4.5% Yield on the property worth $625k) – $28 125
Expenses (allow 1% of value) – $6 250
So cashflow is -$13 125 (i.e. $13125 loss)
Growth of 3% (this is a low growth, only equal to inflation) – $18750
So you end up with a gain of $5625 based on a growth of 3% (which is a bad result, equal to inflation)After 10 years of poor growth of 3% per annum,which is equal to inflation:
Mortgage Interest – $35 000 (you pay interest only on investment loans)
Rent- $37 797
Expenses- $8400
Annual Cashflow is -$5603 (a small loss- after another 3-4 years of this growth it will be positively geared)
Value of House- $840 000 (growth of 3% per year)
Equity- $340 000So you started with $125 000 in equity, incurred cash losses of qpprox $93 640 and finshed with $340 000 in equity. The gain of $121 360 is equal to a gain of 97% over 10 years or 7% per annum compund growth. This is better than cash and not a bad result seeing as I assumed capital growth and rental growth of only 3% per year, and the historical average is closer to 8% per year. Even assuming a capital growth of 5% per year which is still way below the historical average, you get an extremely good return on equity over 10 years. Which is why if you buy assets that grow faster than the pace of inflation, you will do very well, and if the assets happen to only grow at the pace of inflation (which is unlikely if you buy a decent investment) you will still do ok.
In my opinion, if the price of houses only grows at the pace of inflation (3% per year), the economy would be struggling and so 7% would be a comparitively good return.
And yes, incomes will continue to go up and up. Although so will the cost of living (food, electricity, fuel etc) so you wont neccesarily be able to buy more with the increase in income.
Luke.
Luke using your figures
Purchase price $625,000
Loan $500,000
Expenses over 10 years
Interest $350 000
Expenses @ 1% of market value
(inflation indexed @3%/pa) over 10 yrs $ 73,964
Total costs over 10 years $423,964Less income (inflation indexed @3%/pa) $332,862
Net loss $ 91,102Market Value after 10 yrs at 3%/pa CG $843,345
Less Loan $500,000
Less losses $ 91,102Gross Gain $252,243
Less Principle $125,000Gross profit (7%/pa) $127,000
Looks good eh but hold we haven’t accounted for inflation on the original $125,000
$125,000 @3%/pa over 10 years = $168,669
Our real increase in spending power is only $83 574 or 5.13%
By the time we strip out entry, exit (incl any CGT) we’ll be struggling to get any return at all out of this particular investment.
This model doesn’t real prove anything because we’ve basically evened everything out. The lesson to learn is to keep an eye on how inflation is impacting on an investment in terms of asset appreciation/depreciation, expenses and income. It won’t affect all areas the same or at the same time.
the Freckle
Freckle I dont understand what you are trying to prove. You just spat out exactly the same figures as I wrote down.
Invest in cash and you will get a return of 5-6%. Invest in property and you will get a return of 7% if the market performs way below the historical average and only generates 3% price increases, nut more likely 15% or so if it keeps ticking along as it always has.
What are we mean to be investing in?
Cheers,
Lukeluke86 wrote:Freckle I dont understand what you are trying to prove. You just spat out exactly the same figures as I wrote down.Invest in cash and you will get a return of 5-6%. Invest in property and you will get a return of 7% if the market performs way below the historical average and only generates 3% price increases, nut more likely 15% or so if it keeps ticking along as it always has.
What are we mean to be investing in?
Cheers,
LukeThey’re not the same. You didn’t adjust for inflation nor include inflation affects on your initial deposit. Consequently 7% became 5.13%
The point is that inflation is not your friend. It’s simply a force that affects investment both positively and negatively. You can use it when it’s pushing one side of the ledger and structure to mitigate it when it’s pushing the other side.
The problem with inflation when it gets out of control, which incidentally is the potential immediate threat (given central bank balance sheet expansion), is that it can ramp up expenses faster than rental growth and coincide with deflationary forces to reduce asset values.
Inflation isn’t your friend. Friends don’t have a sting in their tail.
The Freckle
Freckle wrote:bardon wrote:Inflation always has been a trusty 24/7 servant of a leveraged property investor
You are kidding right! If you aren’t you have no idea of how inflation works or the FIAT currency system.
eroding debt level and increasing asset and rental values.
If your income rises through inflation and your debt stays the same then yes. An asset’s value has to, at the very least, rise at the same rate of inflation just to hold its buying power. Anything less and you are loosing ground. Rents tend to lag inflation and are dominated by market forces.
Inflation is every PI’s enemy.
The Freckle
I did say when it is unleashed which it will be at some point in time. And yes id do know that there need to be increasing debt levels to feed the interest due of Fiat money.
I would also go as far as saying that the reason why property is such a sound investment asset class over time is mostly due to its proven ability for you to take leveraged debt on that is eroded over time.
simple wrote:+1
In simplified form, if you are in debt – inflation is good. That is assuming business, not personal debt.
If you are saver (in fiat currency), inflation is reducing your savings and is bad for you.I have lived thru inflation and hyperinflation in Poland 1990, Russia 1992 and few others. General rule is, as inflation rate increases – more value you loose by holding the fiat over the same period of time. So people/businesses dump currency and buy goods, assets (land, buildings, factories, very large businesses, infrastructure and so on) and start trading barter (in very bad cases, think Greece).
From PI investor with debt point of view, moderate inflation is very welcome. I know as I am and I can count my money well.
The way I look on it the bets way to derive a benefit out of the situation you have described here is that you should get yourself into as much debt as you can safely handle as early as you can and never ever pay it back. From a purist perspective the investment property is merely the method of securing debt, debt that will pay dividends and growth over time.
You may still experience value fluctuation of the asset you hold, say gold / land / PI. But it will never be reduced to zerro like dollars can be.
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