Inflation exploding...house prices sinking...What will the RBA do?

[Aaron Sice]

divided up for clarity.

Yes very serious

You'd be catching falling knives if you rush in.

who said anythign about "rushing in"? you make it sound like i'm encouraging people to buy whatever regardless.

the opportunity cost of holding an asset that is in a flat and or falling in value would out weigh any of the percieved benefits that you mentioned.


opportunity for....what? growth? in what sector? i see no growth anywhere except for a bit of buillion. opportunity cost is a numpty notion anyway - if you don't see "opportunity" in what you are doing, then don't do it.

it would be much better to wait and get back in, at or near the bottom. even if you get the timing wrong by 12 months you'd be better off than holding a crap asset for 5+ years.

pick the bottom for me. is it now? Sept? Q1 2012? when?

in a period of stagflation, you will struggle to rasie your rents as higher unemployment would put downwards pressure on rents. and the higher interest rates used to combat the high inflation will only cause you pain.

the phillips curve suggests that low inflation = high UE. last time i checked, australia was bucking this trend. we're seeing cost-push inflation, not monetary-easing inflation. one is old school keynesian, one is not.

raising rents slowly until growth returns was my point. not buying somewhere and then aksing $50pw more, immediately.

add falling property prices into the mix and banks will not look favourable at you. imagine if you have a current LVR of 80% and property prices fall 20%. I'm not sure banks will let you have a LVR of 100%+ for too long.

if you have a current LVR of 105% you can't borrow a thing, and if your LVR is 40% then you can borrow lots. what's your point?

Stagflation is bad mmm kay.

people will say "I don't care if the value of my property drops its a long term investment and in 10 years it'll be worth twice as much as I paid for it blah blah blah". but when the property you've borrowed $500K to buy is now worth $350K you are going to care!

of course you would. hwo do you control that kind of situation - with due diligence before purchasing.but considering that most drops in prices have already been realised, well, how much further do you expect them to fall? 5%? 20%? 60%?

you make it sound like people just go out blind and buy any old thing in the hope of growth.

 

[Aaron Sice]

If a period of stagflation is one with persistent high inflation, why would rents not rise while other goods and services do? I understand the unemployment factor, but if unemployment were to place downwards pressure on rents, why would it not have a similar effect on other goods and services as well? In other words, how is rent distinguished from other goods and services, or immune from the persistent high inflation?

my point exactly. stagflation is a cost-push inflation base; the costs of the LL to hold have risen, therefore the cosh-push inflation to the end purchaser - the renter - is realised.

 

[turk]

therefore the cosh-push inflation to the end purchaser - the renter - is realised.

Aaron

I'm sure this would be very effective

Cheers

Pete

 

[bene313]

Aaron

I'm sure this would be very effective

Why not? Is there some anomaly during a stagflation period which causes resi rents to be immune to the inflation which all other goods and services are subject to?

Rents could stay flat or even fall during stagflation times but this would have to occur due to a decrease in demand for rental properties. Surely people must have a roof over their heads. Perhaps during times of low economic growth (such as periods of stagflation) people move in with friends, family etc, thus placing downwards pressure on rents.

 

[Ocean Architect]

my point exactly. stagflation is a cost-push inflation base; the costs of the LL to hold have risen, therefore the cosh-push inflation to the end purchaser - the renter - is realised.

True, but in periods of high inflation, despite the costs of holding going up, the real value of the principal loan goes down in real terms ie in 2011 wages for the landlord (supposing they have a job) might be $50 000pa and their debt $500 000 ie 10 years worth of wages, but with inflation across the entire money base, their wages in 2021 might hit $100 000, and so their principal loan is only 5 years worth of wages (pulling numbers out of the air to demonstrate the point)

So again, it isn't a disaster for a person in the right position. The people who are really going to suffer are those who are overextended, either in terms of leverage, or by holding more properties than they can handle in terms of inflated holding costs.

I still think times of stagflation a good time to swap your PPOR over for something really, really nice in an otherwise out of reach area, so that you can enjoy living there and realise the lowered debt in terms of wages:debt in the medium term

 

[Aaron Sice]

cosh-push - hahaha yes i could beat them over the head for more money....but then my hand would hurt and i've have to get off the landlord couch.

 

[Aaron Sice]

True, but in periods of high inflation, despite the costs of holding going up, the real value of the principal loan goes down in real terms ie in 2011 wages for the landlord (supposing they have a job) might be $50 000pa and their debt $500 000 ie 10 years worth of wages, but with inflation across the entire money base, their wages in 2021 might hit $100 000, and so their principal loan is only 5 years worth of wages (pulling numbers out of the air to demonstrate the point)

So again, it isn't a disaster for a person in the right position. The people who are really going to suffer are those who are overextended, either in terms of leverage, or by holding more properties than they can handle in terms of inflated holding costs.

I still think times of stagflation a good time to swap your PPOR over for something really, really nice in an otherwise out of reach area, so that you can enjoy living there and realise the lowered debt in terms of wages:debt in the medium term

reducing of debt through inflation is only realised upon the release of the debt (good), or usage of the debt as part of an equity package (bad).

otherwise, it's inert.

i tink stagflation is a great time to be OUT and be cashed up to purchase an income producing asset when a ripe opportunity comes along.

 

[Ocean Architect]

reducing of debt through inflation is only realised upon the release of the debt (good), or usage of the debt as part of an equity package (bad).

otherwise, it's inert.

i tink stagflation is a great time to be OUT and be cashed up to purchase an income producing asset when a ripe opportunity comes along.

It is and it isn't, depends on the deal, and depends on how much you value having a very nice PPOR. Apart from that, I agree, if you're happy where you are, having real cash in times of stagflation can land you some excellent deals on (non property) income bearing assets

 

[turk]

Why not? Is there some anomaly during a stagflation period which causes resi rents to be immune to the inflation which all other goods and services are subject to?

Rents could stay flat or even fall during stagflation times but this would have to occur due to a decrease in demand for rental properties. Surely people must have a roof over their heads. Perhaps during times of low economic growth (such as periods of stagflation) people move in with friends, family etc, thus placing downwards pressure on rents.

Because I think using a cosh would be frowned on

 

[bene313]

Anyway why are we talking stagflation in Australia? Our resources sector should keep economic growth in check.

 

[Ocean Architect]

Anyway why are we talking stagflation in Australia? Our resources sector should keep economic growth in check.

because the rest of the economy isn't the real estate sector

 

[Ausprop]

reducing of debt through inflation is only realised upon the release of the debt (good), or usage of the debt as part of an equity package (bad).

otherwise, it's inert.

i tink stagflation is a great time to be OUT and be cashed up to purchase an income producing asset when a ripe opportunity comes along.

I disagree BC... inflation works on all elements of the investment, not just the debt in real $'s

 

[lizzie]

I'm sorry that I even suggested that property could fall in value, how silly of me. please accept my apologies....

but in the context of a hypothetical period of "stagflation" it could be a possibility...

i agree that property prices go up and down ... but unless it was a very poor purchase in a very poor outlook area, i don't think a near 30% drop in value is on the cards.

methinks you might have been over dramatic.

maybe buy for $500k and now worth $470K is more realistic.

 

[Aaron Sice]

I disagree BC... inflation works on all elements of the investment, not just the debt in real $'s

absolutely - but if the prices of houses are stagnant/falling, along with your purchasing power, then it's probably better to be in cash that way you're not likely to get a call from some bank wanting their money back.

 

[BayView]

i agree that property prices go up and down ... but unless it was a very poor purchase in a very poor outlook area, i don't think a near 30% drop in value is on the cards.

methinks you might have been over dramatic.

maybe buy for $500k and now worth $470K is more realistic.

Agree.

The media are the ones who throw around those sorts of figures, and the reason why they might see such a number is because in hard times the first thing to suffer is the top end.

It doesn't take too many houses at that end to be offloaded by overloaded high income earners to affect the sales figures (and many are just as overloaded - if not more than - the lower-enders). They often have to bail out in a hurry, while meanwhile the bottom end has a much smaller turnover of massively reduced sales.

Why? because there are loads more buyers at this end of the market, and everyone wants to live somewhere, so there is usually at least some demand, and the drops in sale prices are smaller.

So, what happens is you might have a number of little sales of yer $250k joints which sell for $235k, which doesn't impact much when you can have one sale of a joint worth $5mill which gets offloaded for $3.7mill due to lack of buyers, and often they are a more unique type of property that won't be everyone's cuppa.

I'm hoping to be able to jump into that level of "down market" purchase and wait a bit for the inevitable surge back up as they do.

 

[buzzlightyear]

Why not? Is there some anomaly during a stagflation period which causes resi rents to be immune to the inflation which all other goods and services are subject to?

The RBA agrees with you bene313.

In its latest statement of monetary policy the RBA have indicated the biggest factors for increases in underlying inflation (not the headline rate) over 2012 and 2013 are non-tradeables.

It is likely that inflation rates for a range of non-tradable items, including utilities (particularly electricity) and rents, will contribute significantly to overall inflation
Statement of Monetary Policy May 2011: Economic Outlook p64

 

[Deltaberry]

They're going to raise interest rates so the house prices sink even further... so obvious. The RBA's job is to make sure there's equilibrium, so you have 10 years of profits now you have 10 years of losses.

 

[albertwt]

I think the RBA will keep increasing interest rates if inflation gets out of control and the unemployment rate stays low irrespective of what the house prices do.

But if house prices do suffer I wouldn't be surprised if the Government steps in with some incentives.

Cheers,
Oracle.

Yes, but the time is still uncertain as now :-|
as many news site said, there will be two more at least of interest rate increase this year because the economic is way to good so far with the stronger AUD$ against USD$

 

[VYBerlinaV8]

Yes, but the time is still uncertain as now :-|
as many news site said, there will be two more at least of interest rate increase this year because the economic is way to good so far with the stronger AUD$ against USD$

Careful - rate rises increase the value of our $ versus the $US. The RBA won't want to increase rates any more than it needs to.

I suspect we'll see a rate rise in a few months, and after that I think they'll adopt more of a wait and see approach.

 

[albertwt]

ah yes, that does sounds right mate.