But we all know now that you have little nett worth so this is your only hope. (A couple of properties and a back office job with a bank which will dump you the day they find you spend so much time on the web, and some of their shares which are losing value daily) You are just a chicken counter. You throw sh!t at me but I have real worth.
Inflation - Your Friend?
- Thread starter yieldmatters
- Start date
But we all know now that you have little nett worth so this is your only hope. (A couple of properties and a back office job with a bank which will dump you the day they find you spend so much time on the web, and some of their shares which are losing value daily) You are just a chicken counter. You throw sh!t at me but I have real worth.
Nothing at the moment, though that could be the large glass of red wine speaking for me I had with dinner...
I just realized you might not be arguing that inflation isn't good for property investors.. but that high inflation isn't proportionately better than low inflation? Otherwise I'm all at sea as your SS does appear to be showing more cokes for the second scenario, though if you are assuming a gap between rise in wages and servicing power compared to inflation then there is opportunity cost to factor for the higher IR scenario.
Also I never use cokes, but big Macs, ounces of Gold, CPI units and teachers salaries
I agree... we may even have to defer to the real world, since the theoretical model doesn't look as if it's ever going to be sophisticated enough.
Inflation is good for a property investor.
More inflation is more good for a property investor.
Too much inflation is likely not good for anyone (Though maybe debtors who can survive hyperinflation intact)
Deflation sucks for property investors.
Anyone disagree?
Nothing at the moment, though that could be the large glass of red wine speaking for me I had with dinner...
I just realized you might not be arguing that inflation isn't good for property investors.. but that high inflation isn't proportionately better than low inflation? Otherwise I'm all at sea as your SS does appear to be showing more cokes for the second scenario, though if you are assuming a gap between rise in wages and servicing power compared to inflation then there is opportunity cost to factor for the higher IR scenario.
Also I never use cokes, but big Macs, ounces of Gold, CPI units and teachers salaries
Onto the second glass myself - one glass helps me think, 2 is not so good.
Yes - that is what I am arguing (that high inflation isn't necessarilly better than low inflation). Property investors (geared ones) occasionally "wish for inflation and I'm not sure if they've thought it through.
The higher cokes in the higher inflation scenario was due to the formula for rent received. Linking it to interest rates gives you some enormous real rent increases - that is what drives the wealth.
The other model where rent was just indexed to CPI gave the low inflation scenario a little more cokes but the results were close. The reason low inflation slightly came out ahead was due to a compounding issue (assuming the bank takes a constant spread on inflation is not exactly correct).
Well me of course! You mean anybody ELSE disgree?
Deflation sucks ... true.
But I disagree that inflation is good for a property investor - in the context of variable interest rates anyway. I think you would be indifferent to it being low, high or inbetween because the interest rate is going to move with it.
I stick by my assertion that it isn't.
Still doubtful.
It certainly isn't good for "every-one" but an investor in tangibles will do better than most and if you have a mortgage against those tangibles you are better off still
Deflation is worst for property investors. Precious metal, and all other commodities' investors lose least, and those who lose least, win!
Totally.
Ok.. I thought you were initially trying to say that any rate of inflation didn't help an investor.. period..
So seems like I'm not as amazed as I once was, wine effect has worn off as well.
Hi all,
Yes Andrew, you've got it.
But that will not be shown by YM's spreadsheet.
Looks like a really simple model is needed so that YM gets it.
Unreal world where in land A inflation is 5% interest is 10% and yields are 5% and all stays constant. Average income starts at $20,000
Then across the river is land B where inflation is 10% interest is 15% and yields are 5%. Average income starts at $20,000
Luckily we can buy for $100,000 in both land A and B.
(actually just realised another weakness in the spreadsheet in that when inflation and interest rates are higher the yields tend to be as well)
Land A
year 1 net -$5,000 house value $105,000
year 2 net -$4,750 house value $110,250
year 3 net -$4,487 house value $115,762
year 4 net -$4,211 house value $121,550
fast tracking this.....
year 15 net +$394 house value $207,892
wages $41,578
Land B
year 1 net -$10,000 house value $110,000
year 2 net -$9,500 house value $121,000
year 3 net -$8,950 house value $133,100
year 4 net -$8,345 house value $146,410
fast tracking this to year 12! say what?
year 12 net +$692 house value $313,842
wages $62,768
In land A after 15 years to get the house to pay for itself we would have an asset that we owned 52% of. We would still owe just under 2.5 years worth of wages to pay it off.
In land B after only 12 years to get the house to pay for itself we would have an asset that we owned 68% of. We would still owe just under 1.6 years worth of wages to pay it off.
more to follow later
bye
Yes Andrew, you've got it.
But that will not be shown by YM's spreadsheet.
Looks like a really simple model is needed so that YM gets it.
Unreal world where in land A inflation is 5% interest is 10% and yields are 5% and all stays constant. Average income starts at $20,000
Then across the river is land B where inflation is 10% interest is 15% and yields are 5%. Average income starts at $20,000
Luckily we can buy for $100,000 in both land A and B.
(actually just realised another weakness in the spreadsheet in that when inflation and interest rates are higher the yields tend to be as well)
Land A
year 1 net -$5,000 house value $105,000
year 2 net -$4,750 house value $110,250
year 3 net -$4,487 house value $115,762
year 4 net -$4,211 house value $121,550
fast tracking this.....
year 15 net +$394 house value $207,892
wages $41,578
Land B
year 1 net -$10,000 house value $110,000
year 2 net -$9,500 house value $121,000
year 3 net -$8,950 house value $133,100
year 4 net -$8,345 house value $146,410
fast tracking this to year 12! say what?
year 12 net +$692 house value $313,842
wages $62,768
In land A after 15 years to get the house to pay for itself we would have an asset that we owned 52% of. We would still owe just under 2.5 years worth of wages to pay it off.
In land B after only 12 years to get the house to pay for itself we would have an asset that we owned 68% of. We would still owe just under 1.6 years worth of wages to pay it off.
more to follow later
bye
I don't have to go work tomorrow so thought about this inflation thing more. Am sure I modelled this years ago but anyway, here's my spreadsheet effort.
I have to say I agree with YM that inflation isn't always the big best friend.
In fact, it appears inflation is pretty lame unless you have growth kicking along simultaneously. And high inflation doesn't ensure high growth....but debt growth does.....which is what Steve Keen has been saying for some time.
And it must be remembered that growth's advantage grows significantly the longer you hold.
Low growth, and high cpi and interest is the worst of the lot.
Of course, the trouble trying to form a dumbed down generalization, is that things are different over 3 and 10 year time periods, and rental yield can vary in synchronization with growth to large extent, and interest to lesser.....
I've made the ssheet highly adjustable if anyone wants to have a play.
I have to say I agree with YM that inflation isn't always the big best friend.
In fact, it appears inflation is pretty lame unless you have growth kicking along simultaneously. And high inflation doesn't ensure high growth....but debt growth does.....which is what Steve Keen has been saying for some time.
And it must be remembered that growth's advantage grows significantly the longer you hold.
Low growth, and high cpi and interest is the worst of the lot.
Of course, the trouble trying to form a dumbed down generalization, is that things are different over 3 and 10 year time periods, and rental yield can vary in synchronization with growth to large extent, and interest to lesser.....
I've made the ssheet highly adjustable if anyone wants to have a play.
Last edited:
I stick by my assertion that it isn't.
Still doubtful.
It certainly isn't good for "every-one" but an investor in tangibles will do better than most and if you have a mortgage against those tangibles you are better off still
Deflation is worst for property investors. Precious metal, and all other commodities' investors lose least, and those who lose least, win!
Totally.
I would have thought that cash would be king in deflation as all goods could be bought cheaper. Look at gold from the early 1980's to 2001. That is deflation. Precious metals and other commodities increase their value in high inflation times as people move from cash (fiat money) to hard assets (commodities etc) to protect their wealth.
Cheers
Shane
"Cash is King" during deflation, that's true. But not all "things" are treated equally.
Logic tells me that collectibles, because of their discretionary nature would suffer badly, as would RE because it's purchase can be delayed. Food and staples can't be delayed so Woolworth's turnover would only drop modestly but their share-price would take a hit as would the rest of the market. Au/Ag, being substitute money would hold up well as would most staples.
Unlike TC, I don't have any silos so precious metals are my chosen store of wealth.
Interestingly Bill you keep coming back and telling me that I don't get it and we need a better model but you are getting closer and closer to my model as time goes on! Yes - 2 Scenarios (or 2 lands A & B) is the way to think about this stuff.
When I get a moment I'll plug your scenario numbers into my model - should fit nicely and see what happens. I suspect it is the yield as a percentage of house prices and house prices moving with inflation which is what is driving the value in the high inflation case.
Bill - I didn't here back from you on this one? You see what I am saying now?
I think this whole debate needs some assumptions to bring it closer to the real world -
Q. What reflects the real world ?
A. Nothing really reflects the real world, because it's constantly changing. And there's no direct relationship between the variables.
I think most posters here are probably right for their chosen assumptions - some reflect the real world (my real world anyway), some appear to be in their own world.
- How is IR related to CPI ?
- How is yield/rent related to CPI or IR ?
- How is growth related to CPI ?
- How long is a time period should be measured ? Is 10 yrs to short ?
- What is initial yield ?
- How does rent/yield increase (with CPI or IRs or Growth) ?
- Is there a time lag between any of these variables ?
Q. What reflects the real world ?
A. Nothing really reflects the real world, because it's constantly changing. And there's no direct relationship between the variables.
I think most posters here are probably right for their chosen assumptions - some reflect the real world (my real world anyway
), some appear to be in their own world.I'll start with the first one - interest rates compared to CPI
Charts going back to 69 here: http://www.henrythornton.com/article.asp?article_id=4914
Unfortunately he doesn't have both on the same chart.
There is obviously a reasonably close relationship between the 2 over the long term. Interest rates both peaked and bottomed out a little after CPI (the delay in peaking was far more pronounced).
Charts going back to 69 here: http://www.henrythornton.com/article.asp?article_id=4914
Unfortunately he doesn't have both on the same chart.
There is obviously a reasonably close relationship between the 2 over the long term. Interest rates both peaked and bottomed out a little after CPI (the delay in peaking was far more pronounced).
Those are great questions. A model represents reality while making many simplifying assumptions. It won't ever capture all the complexities of the real world because the real world is too complex. However by starting out with a simple model and then slowly adding more and more complexity it helps build intuition as to the effects of certain variables. It's an excellent discovery exercise - you can dismiss it as theoretical nonsense but I think that's a wasted opportunity.
In an unregulated financial system there should be a close relationship as the lender will want compensation for inflation. If I lend you $10 and I think inflation is going to be 10% then I will want at the very least $11 back in one year's time. If inflation was 5% then the minimum would be $10.50.
