admin-ajax.php

Is inflation your friend or your foe?

The word inflation is offensive to many people. 

In fact, the thought of increasing inflation produces negative connotations because we know that each year, because of inflation, we end up paying more for everything. increase rate

But here’s the thing…

While inflation is the enemy of the average Australian, especially for those with savings which get slowly eroded over time, inflation actually helps property investors as their assets increase in value due to inflation.

So, while those who are dependent on the interest on their savings find the value of their nest egg eroding in real (after inflation) value, for those who own real estate, inflation pushes up the value of their asset – usually significantly more than the general inflation rate, as inflation in construction costs and land values increases significantly above the general inflation rate.

The impact of inflation

As a property owner, you get a double whammy…

While inflation increases the price of your properties, if you decided not to pay down the mortgage on your home for example, and just pay interest only, your property will increase in value but your mortgage will remain the same in dollar terms. 

investor-enquiry-form

But, the true value of your debt is being eroded by inflation.

Of course, you’ll still need to pay off your $400,000 mortgage one day – but when you pay the it back in say 10 years, $400,000 won’t be worth as much as it is today.

And that’s a pretty good result if you ask me!

Let’s look at this in a little more detail:

Sure inflation in Australia, and in fact in most developed countries, is on the low side at present, but during the 2000’s Australia’s inflation remained stable around 3%.

If the inflation rate is three per cent, then on a $400,000 loan the true value of that debt is reduced by three per cent each year, which is $12,000 or $230 a week!

Therefore, in reality, inflation is paying off your debt faster than you probably can do it yourself!

How do you feel about inflation now?

Learning to love good debt

If you’re like me you would have been taught by your parents not to take on debt, and that when you do you should pay it off as quickly as you can.property house money capital

And it just seems right to pay off your non tax deductible home loan debt as quickly as possible.

But for most property investors, this may not be the right solution.

As I’ve just explained, inflation can work its magic on your home loan -making it worth less in real dollar value –  while you put your hard-earned dollars to far better use such as towards the purchase of another investment property that has “good debt” attached to it.

The secret is that good debt will actually allow the tax department to help you buy that property!

Don’t believe me?

Well, in essence, tax contributes to your property purchase by putting dollars back in your pay packet via the deductions associated with investment property ownership.

In fact, it’s almost like another way of getting a pay rise!

When did the bank last give you a cash bonus?

Inflation reality

At the moment, we have low inflation in the order of 1.5 per cent, which is why we also have low interest rates.interest market

However, when the economy strengthens, correspondingly inflation and interest rates will increase, but as I’ve explained, that’s not necessarily a bad thing.

While we have all probably got used to a low interest rate environment, it’s actually better if rates, and inflation, are higher because it means that our economy is doing better.

So, perhaps when inflation does start to rise – as it inevitably will– you won’t view it a negative.

Instead, you’ll hopefully see it for what it can be, which is your capital growth friend rather than an economic foe to be feared.



icon-podcast-large

SUBSCRIBE & DON'T MISS A SINGLE EPISODE OF MICHAEL YARDNEY'S PODCAST

Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.

icon-email-large

PREFER TO SUBSCRIBE VIA EMAIL?

Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.


Avatar for Property Update

About

Ahmad is the senior property strategist at Metropole Properties Sydney and highly skilled wealth strategist. He is a passionate property investor, has a degree in Commerce, is a licensed estate agent in both NSW & QLD and has personally coached and educated hundreds of clients to create wealth through property.
Visit www.SydneyBuyersAgent.com.au


'Is inflation your friend or your foe?' have 2 comments

  1. Avatar for Property Update

    April 4, 2017 @ 9:55 am Anthony

    Some valid points in this article about inflation and interest rates. However, at least as far as I can see in Melbourne and Sydney I can’t help but feel that low interest rates have inflated property price growth, and an increase in interest rates would have the opposed effect. I am not comforted by this article as a new investor.

    Reply

  2. Avatar for Property Update

    April 4, 2017 @ 12:04 pm Ahmad Imam

    Hi Anthony, thank you for your comment, I always welcome feedback. In my experience there are many reasons and excuses not to invest and I have certainly heard them all over the years and helped my clients overcome them. Although there is plenty of information now available to us at our fingertips, unfortunately majority of that information is misinformation. Which is why it is absolutely crucial to ensure you surround yourself with a team of experts to help you navigate through the minefield of naysayers.

    Will interest rates increase? Absolutely. Will it have an adverse effect on your long term investment strategy? No (as long as you have built the correct foundation and have the right team around you). Do not forget that our parents have lived through wars, depressions, recessions, interest rates of up to 17% in the late 80’s, GFC and numerous changes in state and federal government – and the only thing that has remained consistent is that in the long term property prices have continued to grow. Remember it is not about timing the market but time-in the market. I hope this gives you a level of comfort as a new investor.
    Have a great day.
    Ahmad

    Reply


Would you like to share your thoughts?

Your email address will not be published.
CAPTCHA Image

*

facebook
twitter
google
0
linkedin
0
email

Michael's Daily Insights

Join Michael Yardney's inner circle of daily subscribers.

NOTE: this daily service is a different subscription to our weekly newsletter so...

REGISTER NOW

Subscribe!