WHAT’S HAPPENING RIGHT NOW
In order to understand the property market, it is important to examine the wider economy. Nathan shares his views about inflation, rates and global financial trends below.
Inflation is something that every central bank must manage. Too much inflation means people can’t afford to spend and this affects the wider economy.
The RBA sets interest rates in order to keep inflation in line with its target of 2 to 3 per cent over time.
Keeping rates low ensures that borrowers have more spending money. This keeps the economy going and inflation alive.
FEELING THE PINCH.
Inflation is when the buying power of currency decreases. In other words, money is worth less, making goods and services more expensive.
As time goes on, wages and rents go up.
INFLATION AND DEBT.
Inflation makes debt irrelevant. This is because you end up paying off the debt in inflated dollars. As wages rise and rent goes up, it becomes easier to pay off the debt.
PROPERTY AS A HEDGE AGAINST INFLATION.
Say you had $100,000 in savings. In 30 years’ time, that same $100,000 wouldn’t be worth as much. It would buy you less.
If you had invested that $100,000 into a property, however, the property would have gone up in value in line with inflation. If you sold that property in 30 years’ time, you would receive the $100,000 in inflated dollars – maybe two or three times the amount.
The cash flow of a property also gets inflated too – making it an ideal asset to hold over the long term.
REMNANTS OF THE GFC.
We are still riding the inflationary cycle from the GFC. The RBA has its hands tied when it comes to interest rates. If rates went up, many borrowers would become financially stressed. People would spend less and the economy would suffer.
Interest rates have been at a record low after they dropped three consecutive months in the last quarter of 2008.
APRA introduced tighter lending standards to ensure borrowers could definitely afford to pay off debt. This has held back inflation around asset classes such as property and has done the work of an interest rate increase – without affecting existing borrowers.
WILL THERE BE ANOTHER GLOBAL FINANCIAL EVENT?
While another global recession may occur in the near future, Australia seems well-placed to withstand this.
Generally, governments will overcompensate in order to protect against economic disaster.
It will be interesting to see whether lending policies will ease in the face of economic strain.
High inflation is also a definite possibility over the next decade.
WHERE DOES PROPERTY STAND?
Property will still be a great investment vehicle in light of this. Those who don’t strike the right balance in debt may find it harder to get by, while those who buy the right amount in the right markets will be better off.
What are your views on the current economic landscape? Please share your thoughts in the comments section below.