Les, three points:
1.
you got me thinking about how much of house growth is due to CPI, so I plotted Sydney median house price growth against inflation. I had felt inflation wasn't responsible for the greater part of capital gain, rather population pressure in capital cities, competition for a scarce resource, and increasing investor activity. Indeed, the last boom saw investor activity jump from 25% to 40%.
Further if inflation was the primary driver, then you could invest in any regional town and expect similar growth to the capital cities.
The data I used shows between 1992 and 2003, inflation accounted for 2.5% of 8.1% average annual growth, that's 30%.
However, from the graph it appears the higher inflation levels of the 70s and 80s accounted for more. One might argue that the government and RBA are getting better at regulating inflation, and it is unlikely we shall see high inflation or interest rates again. If so, then we might expect inflation to continue to play a smaller role in house price growth.
So maybe the point is that if one rests on past trends, without understanding that they maybe changing, then one isn't likely to realize full potential gains.
2.
A second point regarding inflation fueled capital gain involves the relationship between interest rates and inflation. The second plot highlights that it is hypothetically a reasonable strategy to buy when the gap between interest rates and inflation is low, or even better still, negative, as was the case in the mid 70s. In such a case, inflation certainly is facilitating cash flows by eroding interest more quickly, and increasing non inflation adjusted equity.
3.
Your point about using inflation's devalued dollars to fund new IP purchases I suppose is what has created so much debate in this thread. If inflation is running at 3%pa, then after 3 years, it would deliver me a 9.3% increase in non inflation adjusted growth. And if I only need a 10% deposit for a second IP, then maybe I can be lucky enough to buy one that hasn't increased to the full extent of inflation, due to market inefficiencies. And if I was smart enough to buy positive cash flow intially, that surplus cash will have assisted in getting that 10% deposit.
So what I am alluding, is what a lot of us might attribute purely to inflation, needs to be looked at more analytically. I am sensing there are many other factors that might contribute to your snowball.
We at least need to be mindful that 2/3 of growth since 1992 has been attributable to factors other than inflation, which might explain why Bill and AD are both partially right. How much inflation, and its relationship with interest rates, contribute to growth in the future, remains to be seen.
1.
you got me thinking about how much of house growth is due to CPI, so I plotted Sydney median house price growth against inflation. I had felt inflation wasn't responsible for the greater part of capital gain, rather population pressure in capital cities, competition for a scarce resource, and increasing investor activity. Indeed, the last boom saw investor activity jump from 25% to 40%.
Further if inflation was the primary driver, then you could invest in any regional town and expect similar growth to the capital cities.
The data I used shows between 1992 and 2003, inflation accounted for 2.5% of 8.1% average annual growth, that's 30%.
However, from the graph it appears the higher inflation levels of the 70s and 80s accounted for more. One might argue that the government and RBA are getting better at regulating inflation, and it is unlikely we shall see high inflation or interest rates again. If so, then we might expect inflation to continue to play a smaller role in house price growth.
So maybe the point is that if one rests on past trends, without understanding that they maybe changing, then one isn't likely to realize full potential gains.
2.
A second point regarding inflation fueled capital gain involves the relationship between interest rates and inflation. The second plot highlights that it is hypothetically a reasonable strategy to buy when the gap between interest rates and inflation is low, or even better still, negative, as was the case in the mid 70s. In such a case, inflation certainly is facilitating cash flows by eroding interest more quickly, and increasing non inflation adjusted equity.
3.
Your point about using inflation's devalued dollars to fund new IP purchases I suppose is what has created so much debate in this thread. If inflation is running at 3%pa, then after 3 years, it would deliver me a 9.3% increase in non inflation adjusted growth. And if I only need a 10% deposit for a second IP, then maybe I can be lucky enough to buy one that hasn't increased to the full extent of inflation, due to market inefficiencies. And if I was smart enough to buy positive cash flow intially, that surplus cash will have assisted in getting that 10% deposit.
So what I am alluding, is what a lot of us might attribute purely to inflation, needs to be looked at more analytically. I am sensing there are many other factors that might contribute to your snowball.
We at least need to be mindful that 2/3 of growth since 1992 has been attributable to factors other than inflation, which might explain why Bill and AD are both partially right. How much inflation, and its relationship with interest rates, contribute to growth in the future, remains to be seen.