Power of Residential Property Investment

Hyper Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.

– Ronald Regan

Is there a serious risk of hyper inflation happening with trillions of dollars of printed money being pumped into the world economy by governments around the globe? Historical evidence shows that when too much money chases too few goods-and-services it invariably results in inflation.

The argument against hyper inflation occurring is that enough money has not been printed to replace the losses from the burst of the credit bubble. Also unlike earlier times factories around the globe have too much excess capacity due to lack of demand. This will imply that prices for consumer goods will remain low with high unemployment. There are some who fear that deflation will occur which is worse for the world economy and property investment in particular.

Since governments world over have been printing money and pouring into the economy there is a distinct possibility of high rate of inflation or even hyper inflation happening once the economy recovers. It is therefore prudent to examine how inflation can affect real estate assets and what steps that we as investors can take to protect our positions.

Is real estate a good hedge against inflation? Is it a good time to buy real estate or should we maintain high cash reserves and risk depreciation of our money? How will hyper inflation affect mortgage rates and our repayment capacity if we are highly leveraged? These are some of the questions that are on every investors mind.

As a rule real assets hedge better than paper assets. This is because real assets like property have a value of their own. Inflation does not erode their value but increases it greatly in relative and real terms.

With hyper inflation the prices of properties tend to move up but the upward movement is restrained by increase in mortgage rates. The dollar value of the properties goes up but the real value after adjusting for inflation can remain static, move slightly up or even move down. As someone rightly said “Inflation is everyone’s illusion of wealth”

As the inflation starts to rise banks raise interest rates to curb inflation. The wages and the rents do not rise in the same proportion as inflation. There is also a time lag in increase of property prices and rent with inflation. This period of time lag is very critical for investors. If your mortgage is not locked in you can find yourself in a severely cash starved situation.

The news gets better with time. As the values of properties start to move up your equity to loan ratio goes up dramatically. You can now borrow against increase in equity of your property to pay for any increase in mortgage rate. Alternately you can sell a few properties (incase you have more than one) to reduce your debt liabilities.

During hyper inflation you make more money with your assets if you are leveraged as long as you can manage your cash flow to meet your loan repayment and expenses on the property. A leveraged property will create more wealth than a debt free property. You should have some cash reserves to see you through the critical phase during the initial part of the inflation when mortgage rates move up and there is a time lag before rents and property prices start to move up.

The most important action you should take is to lock into longest possible fixed mortgage rate that your cash flow can sustain at the first sign of increase in inflation rate or as soon as banks start increasing their mortgage rates. The initial phase is the most critical phase. Once you tide over this period increase in equity of your properties with inflation will give you enough cushion to take care of any potential problems.

Should you buy property when possibility of hyper inflation is around the corner and dooms dayers are in full cry? The answer is a definite yes. Property without doubt is one of the best hedges against inflation. Property prices and interest rates are currently at their lowest. If you have the money then there is no better time to enter the market.