Is property really a good hedge against inflation? Maybe not

Flight2quality

What does this mean for UK house prices?

Source: Bloomberg

Here's the (maybe surprising) answer: probably bad news. Higher CPI normally means interest rate hikes that translate into more costly home loans. That can cut both housing demand and prices. The only real exception in the last 15 years has been mid-2009 to mid-2010, when despite CPI rebounding, bank rate has been held at a record low 0.5%.

But as Britain's cost of living climbs, interest rate rises must follow at some stage. And that's likely to re-establish the historic relationship of higher CPI = less UK house price inflation.


http://www.moneyweek.com/news-and-charts/economic-indicators/uk-house-prices/07-uk-cpi-inflation-and-uk-house-prices-00007

Cleaver

Flight2quality wrote: »

Currency war 3 will be the War to end all currency wars.

When is Currency War 3 out and do you know if it will be out for XBox as well as PS3 as I've heard rumours it may not be? I have Currency War 2 for the XBox 360 and have enjoyed it but really had trouble defeating the Japanese Yen end of level boss on the currency exchange level. The multi-player version online is immense though.

What's your gamertag?

System

Noob, the Yen Boss was easy, you had to shoot it's interest rate to weaken it.

shortchanged_2

The problem is flight2quality is that interest rates aren't going anywhere while the economy is in the state it is in.
With the reason for inflation mainly being external factors being imported in, not the usual consumer spending/wage rises reasons, interest rate rises would probably cause more pain. Yes it may strengthen the pound a bit and reduce some of the import costs, however the propect of more QE will probably nullify that.

While yes you can argue that it is the heavily indebted that would suffer the most from an interest rate rise and there are some out there that will say tough they should of been more sensible in their lending practices. This is a perfectly valid point because where the debtors get some respite, the savers (prudent ones) end up being clobbered.

So this is the problem we have in this country now in that whichever route the UK goes down from here, some groups of people will be more affected than others but it looks like the debtors will benefit more than the savers.

chucknorris

I am actually on the lookout for a good hedge against inflation (that also provides income) for when I sell up as I don't want to hold residential property in my old age, it'll be too much hassle. I looked into freehold grount rents which I think would fit the bill, but I heard that you are forever chasing slow paying leaseholders (that would just annoy me).

At this early stage I'm leaning towards commercial property, if it is let on a FPI (full repairing and insuring) lease, it seems to me that the hassle factor is going to be far less. What I need to get my head around though is:

Voids (I think I would go for lower yielding prime property)
The extent of professional fees (schedule of condition surveys, rent reviews etc)

pararct

Flight2quality wrote: »

What does this mean for UK house prices?

Source: Bloomberg

Here's the (maybe surprising) answer: probably bad news. Higher CPI normally means interest rate hikes that translate into more costly home loans. That can cut both housing demand and prices. The only real exception in the last 15 years has been mid-2009 to mid-2010, when despite CPI rebounding, bank rate has been held at a record low 0.5%.

But as Britain's cost of living climbs, interest rate rises must follow at some stage. And that's likely to re-establish the historic relationship of higher CPI = less UK house price inflation.


http://www.moneyweek.com/news-and-charts/economic-indicators/uk-house-prices/07-uk-cpi-inflation-and-uk-house-prices-00007

If there were a full blown sovereign debt crisis or some (or all) UK banks teetered to a position where not even UK PLC could bail them out fully remember the knock on effect of those CDS (Credit Default Swops) magnify any losses several times over are still out there, then property is still a very good bet.

Your deposits in the bank or investment equity may be wiped out or severally devalued with (high) inflation whilst your bricks and mortar would hold a steady value and rise with inflation.

Flight2quality

shortchanged wrote: »

The problem is flight2quality is that interest rates aren't going anywhere while the economy is in the state it is in.

The problem is shortchanged is that the economy isn't going anywhere while interest rates are in the state they are in.

Catch 22

lvader

Flight2quality wrote: »

The problem is shortchanged is that the economy isn't going anywhere while interest rates are in the state they are in.

Catch 22

You have completely missunderstood, they are saying higher interest rates will be a problem, not that low interest rates are a problem. The only problem with low interest rates is inflation, but inflation is coming down.

chewmylegoff

Property is a good hedge against not having anywhere to live...

Cleaver

Grandstand_Frank wrote: »

This is exactly what i keep repeating to these people, all the time i have been here, in the hope that it will register in their thick sculls.

You've only been here 25 days.

chewmylegoff

Cleaver wrote: »

You've only been here 25 days.

And has only made 17 posts, none of which are about this.