What happens to real estate during a deflationary period

[DavidMc]

Have been listening to various economists who believe we are headed for a period of deflation, followed by high or hyper inflation.

I understand property is a good thing in times of high inflation (as the loaned amount reduces in relative value while rents go up).

What happens in deflation though? What position would you want to be in?

Property values drop?
Rents drop?
Loan amounts increase (in relative terms)?

Is leveraged property in general a very bad thing to own during deflation? Would things be OK if you had good cashflow?

 

[jerrybee]

I'm curious too.

 

[KangaBanga]

perhaps this article helps
http://www.telegraph.co.uk/finance/property/11492192/Could-deflation-wreak-havoc-in-the-housing-market.html

It seems if it is good deflation, which makes things cheaper, like how lower oil prices makes things cheaper, so consumer has more money for housing and rent -> good for property.

But if like what happened in Japan two decades ago, everything becomes cheaper and companies and jobs are lost and everything gets into a downward spiral. -> bad for property.

Would expect leveraged property would be something bad to own in a deflation, as in a real deflation property prices and rent would be dropping. Opposite of owning leveraged property in an inflationary environment. Negative equity is not fun at all.

However if you have cash-flow positive properties and if they remain cash-flow positive during a deflation where rents are falling, then you will be OK until the economy/market rebounds again back up.

 

[Deltaberry]

Look at Japan.

 

[Terry_w]

Take a look at the situation in Japan. The bubble burst around 1991 with deflation setting in and property prices tanking. They have not gone up since - almost 25 years now.

 

[DEC]

Look at Japan.

Japan has a declining population. Less people and more houses
Australia has an increasing population. More people and less houses

 

[lazibones]

Japan has a shrinking market, declining population and doesn't allow foreigners to buy real estate.

 

[Terry_w]

Japan has a shrinking market, declining population and doesn't allow foreigners to buy real estate.

I have a house in Japan but don't hold a Japanese passport. Foreigners are allowed to buy there. Lots of aussies buy in the ski resorts.

But I agree that it is a completely different economy to Australia.

 

[Deltaberry]

Yes very different fundamentals. But all that can change with a few votes in marginal seats. Look at NZ.

Japan is the easiest country for foreigners to buy properties. I've been looking last two years but the numbers didn't work after amortisation of debt. And foreigners can only usually borrow at 2.5%. Being of Chinese heritage freaks me out a bit too holding land there. But I must admit I think most Japanese people have moved on.

 

[DavidMc]

Yes, one difference with Japan would be our increasing population.

Has the SS brains trust been stumped or is Saturday night a bad time to post a heavy topic thread?

 

[jerrybee]

Forget Japan. Japan is in deflation and no one expects anything to change any time soon. I don't think it's a meaningful comparison, by looking at Japan I think you'd only draw the wrong conclusions.

I think the question here is what happens when you are in a short term deflationary period with very strong expectations of medium to long term return to growth? What generally happens in the market when this happens? Do we have any precedents to compare it with?

 

[Deltaberry]

Well not really.

Japan's situation can change very easily. Open up export of its products, apologies for WWII and start reconciling with the Chinese market, open up migration

At some point surely the Japanese will go, well this can't go on forever, we need to re-embrace the world, think about how we grow more people and be savvy about it.

I don't think looking at Japan is a waste of time as this could be the best time to get in. I have a mate there running properties in the central 5 wards of Tokyo getting 20% net yield and his properties have gone up 10% too. Borrowing 50% at 1.5%.

 

[jerrybee]

20% net yield

Really? Hum...I can't stay I'd be opposed to a pad in Tokyo...

What would a nice one bedder set you back? I really like Ikebukuro, I stay there every time I visit.

 

[equitymate]

Japan's situation can change very easily. Open up export of its products, apologies for WWII and start reconciling with the Chinese market, open up migration

I think they have done more than you are aware. Don't let any personal bias get in the way. The ODA and technological transfer happened on a large scale.

http://www.mofa.go.jp/policy/oda/region/e_asia/china/

http://en.wikipedia.org/wiki/List_of_war_apology_statements_issued_by_Japan

 

[Deltaberry]

Really? Hum...I can't stay I'd be opposed to a pad in Tokyo...

What would a nice one bedder set you back? I really like Ikebukuro, I stay there every time I visit.

An agent offered me a 2-bedder that was around 70sqm in a brand new tower near the palace (sounded like something built like Eureka and marketed to foreigners) for around US$1m.

So I'd imagine a one-bedder in an older block must be quite cheap - probably $400-600k?

This guy was more buying $1.5-2.0m old buildings/shops with 2-3 levels upstairs, refurbishing them and using them as hotels. So there's a trick there I didn't mention.

 

[Deltaberry]

I think they have done more than you are aware. Don't let any personal bias get in the way. The ODA and technological transfer happened on a large scale.

http://www.mofa.go.jp/policy/oda/region/e_asia/china/

http://en.wikipedia.org/wiki/List_of_war_apology_statements_issued_by_Japan

Not having a dig at Japan.

More just from observation. So everytime I travel to Japan I'm impressed by all the technology and food they sell at certain places, which I can't find in Canton Fair or in Shenzhen. So they must be not exporting some of this stuff.

 

[DavidMc]

I think the question here is what happens when you are in a short term deflationary period with very strong expectations of medium to long term return to growth? What generally happens in the market when this happens? Do we have any precedents to compare it with?

Yes - this.

So in Australia, would any drop in prices be balanced out by the demand from new Australians / immigration?

Would the powers that be just import more people to prop up the house prices (as they have done in Europe with Russians/Chinese putting a floor under prices in Portugal and Spain and their 'golden visas')?

 

[MTR]

Have been listening to various economists who believe we are headed for a period of deflation, followed by high or hyper inflation.

I understand property is a good thing in times of high inflation (as the loaned amount reduces in relative value while rents go up).

What happens in deflation though? What position would you want to be in?

Property values drop?
Rents drop?
Loan amounts increase (in relative terms)?

Is leveraged property in general a very bad thing to own during deflation? Would things be OK if you had good cashflow?

Yep all of the above
Deflation to me is same as buying in a downturn, which means your asset value will fall in price

Ideally you would time it and buy in a rising market.

 

[MIW]

perhaps this article helps
http://www.telegraph.co.uk/finance/property/11492192/Could-deflation-wreak-havoc-in-the-housing-market.html

It seems if it is good deflation, which makes things cheaper, like how lower oil prices makes things cheaper, so consumer has more money for housing and rent -> good for property.

But if like what happened in Japan two decades ago, everything becomes cheaper and companies and jobs are lost and everything gets into a downward spiral. -> bad for property.

Would expect leveraged property would be something bad to own in a deflation, as in a real deflation property prices and rent would be dropping. Opposite of owning leveraged property in an inflationary environment. Negative equity is not fun at all.

However if you have cash-flow positive properties and if they remain cash-flow positive during a deflation where rents are falling, then you will be OK until the economy/market rebounds again back up.

I agree, if you would be highly geared then you could suffer, as loans repayments would not go down, would not deflate, yet income would.
Say you have $2,000 coming in every week and out of that you are left with $200 for your luxury spending, $600 for loan, $1,200 left for the rest, bills, food, insurances, schooling, the rest of the budget required spending.
Imagine the income now you receive is $1,600, so now you still owe $600 for loan, $1,200 for necessary budget spending, so now you are short of income of $200 for necessary budget spending, with no money left for luxury spending!!!
Generalised example but I hope it helps!

 

[2FAST4U]

The exact opposite of inflation. With inflation your repayments get lower over time as your income rises and rent rises due to people being able to pay more. With deflation capital growth, income, and rents all stall.

Moderate drops in certain products, such as food or energy, do have some positive effect on consumer spending. However, a persistent fall in prices can have severe negative effects on growth and economic stability.When an economy experiences a severe recession or a depression, economic output slows as demand for consumption and investment drop. This leads to an overall decline in asset prices as producers are forced to liquidate inventories that people no longer want to buy. This leads to a vicious cycle as seen with Japan over the past 25 years.