Inflation – your investment/real estate companion and BUDDY

This post follows up on the idea of after-tax returns on your home (and your real estate investments, albeit as a Capital-gain {about 50% taxable} vs Tax-exempt {0.0% taxable})

This time we look at appreciation of Property Prices, AFTER CPI inflation, in terms of cash-on-cash return.

Toronto CPI-Adjusted Prices4-CPI-adj-TREB-pricesVsNominal-Dec2017

This graphic shows the Average Annual Toronto Real Estate Board (TREB) residential prices from 1969 to 2014, in constant (Sept. 2014) dollars using the Bank of Canada Inflation Calculator  — I’ve put the Nominal (actual, then$)Price vs CPI Adjusted Price Graphic at the bottom of the post


These adjusted-prices are then expressed as a percentage of the adjusted-annual-average price in 1989 – the previous peak in TREB prices.

On this graphic you can see the steep incline in the late 1980’s, the reversal in prices (in equal-opposite reaction to the super-high interest rate policy, world-wide, that was the then-current method for curbing “inflation-the-beast”) and then the upward incline from about 1996 until now (last entry is 2014 annual average TREB price, supplied in Jan 2015)

A straight-line from 1969 to 2014 which shows a tripling in price AFTER CPI (323% over 45 yrs = ~4.7%)

A straight-line from 1996 to 2014 showing a just-about doubling in AFTER CPI (18 yrs =~5.7%)

AND 121.26 as the net gain, peak-to-peak, AFTER CPI is removed.

In other words the home purchased in 1989 for ~$273,698 and held (through thin and thick) a) has outdistanced inflation by 0.85%/yr average b) after 25 yrs is most-probably mortgage-free (assuming a 25 yr amortized plan) and c) in nominal 2015 terms is worth $565,696

Someone who purchased in 1996 for ~$198,150 did better (vis-a-vis both net-of-inflation and as an annual percentage), because they “bought at the bottom”.

Inflation is your Buddy, because Tangible Assets Hold their value (in real terms) and simultaneously this means they appreciate (nominal terms) in a time of Inflation

BUT that is past … what’s the future?

Are we nearing the new “peak”, in a “bubble”, experiencing housing price 10-30% over-valuation (BofC doc pg 15-18) — a laughable variance which says nothing predictive or cogent, except “saying something” about book-learning of the analysts behind the SpokesGovernor)

Two things:

1) Do you think we will experience greater-than 2% inflation over the next 10 years?

2)Do you think interest rates will move by more than +1% in the next 3 yrs and by +3% in the next 10 yrs?

If you think we’re all going to experience a huge monetary/fiscal/economic crash with huge deflation-where everything loses 10-75% of its nominal value … well, I cannot fight that preconception (wishing you well with stocking your survivor bunker) except to ask ” Why didn’t that happen in 2008?”  and answer my own question with “because it’s not in ANYBODY’s self-interest for that to happen AND self-interest prevails.”

If the world’s experts/custodians/stewards decided to “paper-over” the 2008 crisis, they’ll do it again.

That’s why I say Inflation is your Real Estate Buddy.

It’s hedge against inflation, it provides shelter(everybody gotta live somewhere), YOU pick your neighbours, the debt you use for leverage eventually does get retired (forced savings really) …

and … if you live in a country that has recently (last 5-10yrs) been acknowledged as an OK “safe haven” (foreign monies will flow here)

and … if you happen to live in a city that has (finally) been acknowledged as #1 in the World (quality/safety-seeking people will come here)

and … if you appreciate that the drop in the $C vs $USA has just put ALL our real estate “on sale”

AND …. if you live in the GTA that has growth/sprawl boundaries erected around it (Green Belt Act) and had designated intensification zones identified (Places to Grow Act) then the old saw “Land – they ain’t making any more of it” is about to come true, even MORE than in the last 10 years.

We are going to see Property Prices appreciate for supply reasons, for demand reasons, for currency reasons, for zoning/planning/re-intensification reasons

and for inflationary reasons too.

Governments are the biggest debtors – examine Ottawa’s Debt ($889.4Bn 3/31/14) to Revenue ($271.7 Bn 3/31/14) ratio –– it’s 327% of Revenue

or Ontario’s Debt to Revenue (Public Accts 3/31/14)= $295.758 Bn Debt to $115.911Bn Rev =255% of Revenue

Given this …ain’t it odd that the Bank of Canada goes all sanctimonious and TvNewsTalkers put on a “panicky look” when Cdn Household debt ratio hits 160!!

To get out of that debt/bond-age they’re now going to pay off principal (heck while in deficit, they’re not paying all the interest, they’re borrowing it each year)

To get out of debt/bondage they’re going to “inflate out”.

Gradually let prices/wages/property prices/everything “go up” subtly, imperceptibly at say 2% a yr (see Rule of 72 site – calculate  how 2%/yr = ~25% in 11 years)

WHY “inflate out”? – simple, the principal balance of a debt is fixed in dollar terms, if the “value/buying power” of future dollars goes down (undermined by inflation) then a) the (fixed$)DEBT to (future-cheaper$)Revenue (or GDP) ratios fall “into line” and b) the rising $amount of incomes is STILL TAXED at the same (or higher) rates of tax = more Revenue.

But won’t inflation over the “magic 2%” threshold spurn an interest rate hike?

Yes, but only a slight increase (0.25-0.50% in yr #2, another 0.5-.0.75% after that) AND ONLY after the “governors” decide they’ve ~”let the stimulating effect of 2.75%-3.15% inflation impact/correct/mitigate/un-do the past effects of prolonged sub-2% growth”~ — wait for it.

YES, but rates won’t go to 6% or 8% or first mortgages at 12% etc…WHY? because it would break every gov’t budget in the country and in the world …remember THEY are the biggest debtors.

SO…back to the beginning … Inflation IS your Real Estate Buddy and So is Borrowing …ESPECIALLY in inflationary times.

Lastly – here’s the Nominal TREB Annual Prices (Blue) and the CPI-Adjusted to constant 2014 (Purple)

CPI-Adjusted vs Nominal Prices4f-CPI-10_5_5_5


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