MY PROPERTY VIEW - THE EFFECTS OF INFLATION ON PROPERTY

Private Property South Africa
Justin Clarke

The beginning of a new year is a time to plan and to think about how we are going to look after our cash and build wealth and security. In this decade many ordinary people have become extremely rich from the appreciation in the value of their homes and investment properties. Even considering the recent recession, property has been good bet over the last nine years.

I have a strong bias toward property as an investment class, but let me give you my opinion of where we are and what the future holds.

Interest rates have dropped by 5% to a prime of 10.5%, but still the economy is flat with very low growth projected for the balance of the year. Rates would have dropped further but with inflation stubbornly still holding its ground (now just over 6%). Average house prices are similarly predicted to move slowly forward at around 6%-7%, that is not much faster than inflation.

But what of the medium term?

Inflation is caused by many factors but in our case two big issues keep the economy locked down. We have huge inefficiencies in government and the Parastatals and at the same time any increase in the cost of oil affects almost all input costs. Government, now firmly in the hands of the OLD left, seem determined to meddle with the Reserve bank to create an environment of lower interest rates and a devalued Rand in order to create a short term stimulus, the result unfortunately higher inflation. We will have to pay for the inefficiencies of the Parastatals and there seems like little chance that Eskom will not get away with their proposed price increases again pushing costs and compounding the inflation problem. The pressure to deliver on promises made to their constituencies will be too great to ignore …so politicians will prevail.

But there is a silver lining - inflation is good for those who are highly geared, and most of you reading this blog will be hocked to the eyeballs. The good news is that prices of everything move upwards, but your borrowings stay the same. Effectively your bond devalues in real terms, while your rental income will go up together with the value of the property.

The new decade will have the same challenges that we have had throughout the ages, but with more people chasing fewer resources, I will again bet on Property….

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