INFLATION and the PROPERTY MARKET.

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. A lot of people have asked - if there is any form of direct relation between inflation - versus the real estate. I would say that there is a very obvious correlation between inflation and house prices; and in fact, inflation would relate to any item with a limited supply.

Think of this in a very simple way... Consider an economy that has a money supply of only $10 and five identical houses in the whole economy. Each house would be priced at $2 (assuming no other goods in the economy). Now, suppose the central bank decides to print more money and the money supply expands to $20. Now each house would be priced at $4. In this simplistic example, increasing money supply causes inflation and house prices to increase.

So, to further put it into today's market comparison... 

Last month, the Government announced an increase of RM0.20 per litre on fuel - which has immediately prompted research houses to predict an inflation of 3-3.5% by the end of the year. We have already very quickly saw the increase of prices in teh tarik, your roti canai, your daily foods etc etc.... Then just this week, the price of cigarettes went up to RM12. All this have caused the cost of living to go up - and importantly, it has resulted in a very very very critical element of inflation - one that will affect each and every one of us - and obviously, it will affect the Property Market. Well, inflation is like a cancerous growth - it is a slow killer which erodes the value of money. Take Zimbabwe for example - if you were a billionaire 10 years ago, your billion dollars now is only worth like ten dollars back then.

So, lets put it in the property market... I have always said that property investment is the best hedge against inflation. If you came to me 3 years ago, I would say that just buy any property you see that is RM300,000 and below, or those that fetches at least 8% yields. But today, the same properties would be worth at least RM400,000 now - which is a substantial amount of profit already. One should take note on how inflation affects mortgages and housing loans. Bear in mind, assuming inflation is constantly on the uptrend - your mortgage repayment of, say RM2,000 today and assuming 30 years later... also the same RM2,000 - the real value of your money at the time of borrowing is much higher than its real value at year 30. As loans are not adjusted for inflation - the main beneficiary is the borrower. 

Well, not entirely though. Inflation also affects the interest rates...... and your repayment amount may be adjusted a bit. Most mortgages and housing loans today are affected by the fluctuation of the Base Lending Rate (BLR), which is monitored by Bank Negara Malaysia with the Overnight Policy Rate (OPR) decided during the Monetary Policy Meeting. I blogged before back then on how the interest rates affect your repayment amount - and seriously, it is really not much.

So.... inflation or not, just go out and buy yourself a property. 

You will not regret it at all.