Are we investors or speculators?

[Ausprop]

Can you explain how high inflation is good for an investor? Sure your house goes up in value but so do the costs. Rent is worth less as the dollar is worth less.

the key point is that the debt deflates because it remains fixed. If you have a neutrally geared property (and to varying degrees if you are neg or pos geared) you are getting a free ride because your debt is deflating (by the rate of true inflation, not CPI)

I have pondered this topic a lot as a way of self criticing the value of property investing. I am a firm believer in property primarily because of my faith in debt deflaion, with growing yeild and cap values a bonus.

in arriving at this, I have had to work out who is footing the bill. Generally it's depositors of cash at the bank and the effects of fractional banking.

 

[DanielG]

the key point is that the debt deflates because it remains fixed. If you have a neutrally geared property (and to varying degrees if you are neg or pos geared) you are getting a free ride because your debt is deflating (by the rate of true inflation, not CPI)

I have pondered this topic a lot as a way of self criticing the value of property investing. I am a firm believer in property primarily because of my faith in debt deflaion, with growing yeild and cap values a bonus.

in arriving at this, I have had to work out who is footing the bill. Generally it's depositors of cash at the bank and the effects of fractional banking.

I understand that the debt deflates, but if you want to use equity or savings to buy into your next IP to grow your portfolio, isn't it all relative? As in your next purchase will cost you alot more money because of inflation?

 

[Nommy]

debt deflation theory works well with a low long term fixed rate loan (20 yrs), not as effective here in Australia as most fix for the short term and the longer term rates are quite high (7 yrs +). As inflation rises, so will interest rates. Debt is deflating yes, however will be partly negated with higher interest rate once you are off your fixed.
Would need ongoing capital appreciation & rental increases to keep it going.

 

[steveadl]

I understand that the debt deflates, but if you want to use equity or savings to buy into your next IP to grow your portfolio, isn't it all relative? As in your next purchase will cost you alot more money because of inflation?

You've sort of answered your own original question here about whether it's speculating that house prices will continue to rise.

Even if the house you buy only rises because of inflation, do you care in 10yrs if that $100k increase was just inflation? It's still $100k which you haven't had to pay for, and your rent now covers your fixed mortgage amount (which hasn't inflated) and the other incidentals like council etc (which have increase, but rent outstrips these in my experience). This $100k will get you into the next property at no cash cost to yourself, and the whole process can begin again.

Would you want to use your own cash for a deposit for the next property, or would you like to just use the free equity you've been given from the other property? Even if you did want to use cash, don't forget (as so many of my customers conveniently do!) that your ability to save has also increased as wages have continued to rise in an inflationary environment as well. So even if you were using cash to save for a deposit - the first house you were able to save say $300pw, by the time the years have rolled by and you're saving for your next property after inflation of wages, you're now saving $400pw.

House price inflation will hurt you if you are not already in the market. Once you are....

 

[tubs]

On speculators...

Any investment has an element of speculation. There is no such thing as a zero risk investment. People invest in property hoping for a gain the same way as people invest in the sharemarket, options, CFDs, currency etc hoping for a gain.

People who call investors speculators are bearish on property. Its a term they use to have a subtle dig.

Property is, however, far less speculative than shares. After all, you can see your property, study the demand, look at the neighbourhood, get the house checked out etc etc. You can't do this with shares. Most of the time you dont know what's happening inside a company until an announcement has been made. So with information on a company harder to come by investing in shares is far more speculative.

 

[tubs]

On inflation

One of the things inflation does is erode the value of money. And if you have a loan that's great. After all 20 years ago $100k was a big loan, but thanks to inflation it no longer is. So inflation reduces the size of our loans.

It also pumps up the prices of our houses. If you only have one house then you would not benefit, because as the price rose so would the price of other houses you might want to buy instead.

But if you have more than one house then the rising prices adds more to the prices of these houses, and you get the gain.

So I love inflation!

 

[Nommy]

loving inflation is one thing, feeling it on the back end is another.
increase in the money supply = inflation
contraction of bank credit/decrease in the money supply = deflation

we aint seen it in Australia yet, yipee!