There are many predictions on the future economy, in Australia. Some believe it will recover by early next year, some believe it to recover end of 2010 .. and some sits on the fence with the 'wait and see' on the results of the stimulus package from many countries.
I am trying to figure out the following – and I need views (would be great with facts). What would happen if this hypothetical scenario happens …..
High inflation (eg. 6% or more) and a continuous bearish/deteriorating economy in Australia ?
High inflation does not occur. The RBA increases interest rates to slow down the economy and have a 2 to 3% target range.
So if economic growth occurs the RBA starts to rise the interest rate to maintain sustainable economic growth (2 to 3%).This has the effect of making property investing more expensive.
If you have say as a likely bad scenario that interest rates are 10.5% but the yield from a property is say 4% then it is costing you 6.5% * bank loan balance to invest in a property.
Where as if the loan interest rate was 7% then it is costing you 3%
On a 400,000 loan 6.5% = 26,000 a year and 3% is 12,000 a yearSo when property investors leave the market as well as mum and dad first home buyers the demand for property decreases and the supply of houses for sale increases. House Prices fall as well.
Then new home buyers stop buying newly built homes as it is also expensive due to higher interest rates and then builders can't get enough work to feed their family. Carpet manufacturing, roof tile makers, furniture makers, paint makers, painters, plasters, plumbers, electricians, brick layers, concreters, landscapers , ect are affected by this building downturn.
Then people hold onto their car rather than buying a new car so then car manufacturing is affected.This effect is not instant it takes time for the higher interest rate to take effect in the economy this is known as the lag effect in economic theory.
Duckster, interesting insight on what might happen to the property market if interest rate rises.
Pondering on the articles below …. could there be the 'hypothetical' scenario of inflation (results from creating/printing more money + borrow more money via international funds and Government bonds) – a situation like Zimbabwe. However, the economy confidence is still low through a prolong bearish market.
Arcticle
"<A website> going to comment on this astonishing fiscal irresponsibility of Congress and the Federal Reserve, but instead they commented on the $787 billion, 1,074 page stimulus bill that was just signed by Obama by noting, "The current 'stimulus' package of $787 billion is more than the entire National Debt in 1978 ($771 billion)." The same situation happens to us in Australia, where we are in deficit after year of +ve figures; we many pump in more $$$$$$$.If Australia stimulus package(acts like a cough syrup) does not cure the sickness, then the cough would return and permeates through the market confidence. When it's bad enough, then insuers/financial institute/car manufacturers would 'wave' the white flag and seek for Government bailout… Government has to seek or 'make' more $$$$ via the many creative financial ways. Otherwise, it would affect (1) Financial liquidity (2) Ability to renew short/medium term loans by major companies (3) jobs (4) welfare of the society – health and crime … to name a few that i know.
As you mentioned, if inflation goes up, the Government would increase interest rate – hence, it would be a negative cash flow investment. On the other hand, during the period of inflation the cost of material to build a house would also increase. This means there will be capital grow … with a caveat – if there is still demand for houses to rent or own (this is a debate I had with a friend but towards no conclusion
).
Thoughts or comments?cheers
hingko24If you just print money then you get a situation known as hyper – inflation.
step 1
As goods prices increase
step 2
– workers want more wages because prices go up – wages go up – this leads to prices of goods going up-
go back to step 1
Soon you need a wheel barrow of cash to buy a loaf of bread.Duckster, many thanks for your time and thoughts.
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