Keep Your Eye on Inflation!

Posted on 28. Jul, 2009 by Chris Lang in Economic Issues, Global Scene, Interest Rates, Investment Opportunity, Property Cycles, Your Exposure

Australia is supposed to be in the midst of a recession; and yet, underlying inflation is still running at 4% per annum.

If that's the best we can do ... what levels will inflation finally reach, once the economy moves into its recovery phase?

Strong sales have seen retailers cutting prices less than expected. And generally, other prices have held firm — because wages have not yet been affected by increases in unemployment.

On top of this, there are also serious supply constraints on the housing front, which are pushing up rentals.

How will this affect things?

Governments worldwide have borrowed unprecedented amounts, as part of their stimulus packages — while their tax revenues have actually fallen, due to the current recession.

These packages have provided a short-term solution. But equally, have created a massive debt problem for all governments around the world.

It's a problem that will be greatly helped by allowing inflation to grow strongly — because that would quickly reduce the real value of their debt levels, by the time it has to be repaid.

In Australia, the Reserve Bank (RBA) will probably need to raise official rates by 1% over the next 12 months, in an attempt to control inflation.

Clearly, curbing inflation won't help any governments with their debt repayments. Nor would Kevin Rudd want to cope with rate increases during an election year.

Therefore, you can expect to see inflation surge over the next five years. And interest rate rises will follow, immediately after the next election.

What does this mean for Commercial property?

On balance, rising inflation is good for property values. However, just make sure your automatic rental increases on any leases are tied to CPI — and not fixed at 3% or 4% per annum.

AS such, you ought look to purchase your investment properties over the next six months; with the idea of being out of them in about five years' time — when interest rates could well be approaching 12% per annum.

At that point, inflation will continue to provide capital growth — so there will still be a perceived upside. However, interest rates will not yet have peaked.

Therefore, you will be better placed by cashing in; and enjoying the high interest rates for the following 2 to 3 years, before a severe market correction occurs.

Tags: chris lang, interest rate rises, investment properties, massive debt, property values, rate increases, rba, rental increases, strong sales, supply constraints