Hi all,
Acey,
You actually don't get it, do you???
In the example I gave, even though I only have $44,000 that is worth half as mush as it was 10 years earlier, I have $44,000 that I did not have previously.
If it was an IP, lets look a little more in depth.
Say we owned our own PPOR and bought the IP for $44,000.
rent return at $70 pw = $3640 pa
In our inflationary environment interest rates stay at 9.5% for the 10 years.
Borrow $44,000 interest = $4180 pa.
Now the rent return grows every year with inflation.
y2 = $3902
y3 = $4183
y4 = $4484
y5 = $4807
y6 = $5153
y7 = $5524
y8 = $5921
y9 = $6348
y10 = $6805
y11 = $7295
etc
Over the life of owning the property, inflation has turned a negative cashflow into a positive one.
But wait there's more!
When the property was purchased, it cost 3.142 times annual income of the purchaser.
Now after 10 years, it will only cost 1.571 times annual income of the purchaser to pay off the loan (if I wanted to).
No "real" (as in after ajusting for inflation) appreciation in the value of the property was necessary for this to become a good purchase. All it had to do was rise by the rate of inflation.
I'll even make the statement that most property, over the longer term has had most of it's appreciation due to inflation.
Yes there are areas and times when the the growth accelerates due to changes in economics/demographics/price of petrol/lifestyle aspirations/etc/etc.
Let's look at the situation of the same property with 0% inflation for the 10 years.
Income is still $14,000 pa
Rents are still $70 pw
House value is still $44,000
So Acey, do you see no difference in owing 100% of the value of the house and only owing 50% of the value of the house??
Do you see no difference in having $70 pw in income to pay off a $44,000 loan, and $140 pw in income to pay off a $44,000 loan (yes I know to expect higher interest rates with inflation)???
Do you no difference in having a personal income of $14,000 pa to service a $44,000 loan, and a personal income of $28,000 pa to service a $44,000 loan???
For the investor, there has been a real rate of return. There is now $44,000 that appeared from nothing, BECAUSE of inflation. Without inflation there was a zero rate of return.
Inflation is the friend of the leveraged property investor, and if an investor had locked in low interest rates, then they would be laughing.
Inflation erodes the value of savings, but the reverse of savings are borrowings, and it has the reverse effect on them.
Trying to bring this back to Georges thread, the relevance to an average property in an average suburb, without the factors that would lead to an increase in value above the rate of inflation, means it would be a drain on cash for a long time while inflation remains low.
bye
P.S.
Acey......
"Consider your scenario killed Bill! (Part 3)"
Is that really necessary??
Acey,
You actually don't get it, do you???
In the example I gave, even though I only have $44,000 that is worth half as mush as it was 10 years earlier, I have $44,000 that I did not have previously.
If it was an IP, lets look a little more in depth.
Say we owned our own PPOR and bought the IP for $44,000.
rent return at $70 pw = $3640 pa
In our inflationary environment interest rates stay at 9.5% for the 10 years.
Borrow $44,000 interest = $4180 pa.
Now the rent return grows every year with inflation.
y2 = $3902
y3 = $4183
y4 = $4484
y5 = $4807
y6 = $5153
y7 = $5524
y8 = $5921
y9 = $6348
y10 = $6805
y11 = $7295
etc
Over the life of owning the property, inflation has turned a negative cashflow into a positive one.
But wait there's more!
When the property was purchased, it cost 3.142 times annual income of the purchaser.
Now after 10 years, it will only cost 1.571 times annual income of the purchaser to pay off the loan (if I wanted to).
No "real" (as in after ajusting for inflation) appreciation in the value of the property was necessary for this to become a good purchase. All it had to do was rise by the rate of inflation.
I'll even make the statement that most property, over the longer term has had most of it's appreciation due to inflation.
Yes there are areas and times when the the growth accelerates due to changes in economics/demographics/price of petrol/lifestyle aspirations/etc/etc.
Let's look at the situation of the same property with 0% inflation for the 10 years.
Income is still $14,000 pa
Rents are still $70 pw
House value is still $44,000
So Acey, do you see no difference in owing 100% of the value of the house and only owing 50% of the value of the house??
Do you see no difference in having $70 pw in income to pay off a $44,000 loan, and $140 pw in income to pay off a $44,000 loan (yes I know to expect higher interest rates with inflation)???
Do you no difference in having a personal income of $14,000 pa to service a $44,000 loan, and a personal income of $28,000 pa to service a $44,000 loan???
For the investor, there has been a real rate of return. There is now $44,000 that appeared from nothing, BECAUSE of inflation. Without inflation there was a zero rate of return.
Inflation is the friend of the leveraged property investor, and if an investor had locked in low interest rates, then they would be laughing.
Inflation erodes the value of savings, but the reverse of savings are borrowings, and it has the reverse effect on them.
Trying to bring this back to Georges thread, the relevance to an average property in an average suburb, without the factors that would lead to an increase in value above the rate of inflation, means it would be a drain on cash for a long time while inflation remains low.
bye
P.S.
Acey......
"Consider your scenario killed Bill! (Part 3)"
Is that really necessary??