Hyper Inflation - How Does It Affect Real Estate Investment?
Specialist · Auckland, Auckland · Member since 2010 · 16 posts · 1 vote
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.
What should an investor do if hyper inflation does occur. I will appreciate your comments on this very important topic.
Colin
[LINK REMOVED]
Eddie- you aren't old enuff to remember those interest rates! I am. As I've posted before, the inflation during those times annually was ALMOST the same. If you own lots of real estate, you'll become a millionaire almost overnight, on paper.
Less people will be able to get qualified. That WILL BE the time to sell on owner financing, if you ever plan on it, imo. At least a 12-14% rate will look good on paper. I took back lots of notes at 11-12% back in those days for commissions, sales, etc. Rich
Read my take on it here
http://www.biggerpockets.com/forums/49/topics/49632-u-s-bankrupt-by-2-19-guaranteed-
A very interesting article on where USA is heading. But I believe in the resilience of Americans to get their house in order.........they have the best economists and brain power. Greece was a case when the government failed to reveal the true state of their finances.
I respect your faith in the American way, but on September 14, 2008 the US government not only didn't tell the American public how deep we are in the financial mud. They only learned about it themselves on September 15 (The day after...) That even scarier...
Praveen- the U.S. govt has absolutely NO intention of telling the American people how bad the boat is leaking,,,,until the boat has sunk, imo. Scary things going on here. Time to move to MX,tic. Rich
Sorry Praveen- i forgot to address your question. What does an investor,,,,,,,,. If an investor waits until hyper inflation, he waited too long,imo. Back in the 70s-80s, we bought as much property as possible with as little cash as possible. Lots of easy FHA and VA assumptions. Those don't exist now. It needs to be owner financed properties you buy. Rich
It is helpful to define what you mean by hyperinflation, as views vary substantially. Wikipedia says on the low end it's at least 100% over 3 years. But they also say it could START at 50% per MONTH, and it is typically measered per month. In the latter case, hard assets; preferably usable, securable, and portable hard assets, are what you want.
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 (in case you have more than one) to reduce your debt liabilities.
Someone inquired about my name. My name if Praveen (Colin) Kumar
http://www.shadowstats.com/
For properties you hold with fixed-rate debt on 30-yr notes in your name personally the debt will have a "real" interest rate of close to zero or a negative value as rates rise. Note that subject-to purchases give the lender the ability to make previously non-callable notes callable. The probability of these notes being called will increase appreciably as interest rates follow inflation expectations to the upside.
All of this talk about hyperinflation is misplaced in my opinion. We have the strongest and largest economy in the world with the world's reserve currency. Hyperinflation isn't going to happen here.
When interest rates go up borrower's win, therefore with hyperinflation, borrowers win big time. This is true to the extent that your fixed rate mortgage payment will get smaller and smaller in nominal terms. e.g When the price of a loaf of bread is $500 your mortgage payment of $1000 will seem very insignificant. However, since real estate is mostly a highly leveraged asset i do not think it will increase at the rate of inflation, i.e you will see weakening demand for loans when rates are at 20%. Of course this weakened demand will be partially offset by the decline in the value of the dollar.
Invest in Gold and other storable commodities and you will be able to pay cash for your next property.
I am sure the people in the weimar republic thought that it couldnt happen either.
Just my thoughts.
Phil
"Paper money eventually returns to its intrinsic value -- zero." Voltiare
I agree with comments made by Phil above.
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.
Praveen
Copied from another thread you started
First off, I really wish the media would stop using this cliche', especially in the U.S. Our money supply is not determined by how many "Greenbacks" the treasury prints. Think about it, when is the last time the government paid for anything with cash?
Our money supply is controlled by the Federal Reserve. All that "printed" money just sits there until the Fed "monetizes" it, i.e., turns it into legal tender. It might be more accurate to say the government is printing "debt" (selling treasury bonds) rather than printing "money". When the Fed purchases that debt from the open market, liquidity is added to the system. That would normally be inflationary, but nobody is spending anything, hence the deflation. IOW, the money is out there, but it's not changing hands.
Imagine you had $1 million in the bank and I was trying to sell you my house for $500k. Obviously, you have the money, you can afford it, but you just don't want to spend that much. After a year of runaway inflation, your bank balance grows to $1.5 million. I try to sell you my house again for $750k (adjusted for inflation). But you still won't budge. However, I really have to sell this house now, so I lower the price to $350k before you strike. There you have it: Deflation with an increasing money supply.
The moral of the story? All the money added to the economy won't result in inflation unless that money is making into the hands of the spenders. That's not occurring now. People are losing their jobs, losing their home's equity, losing their credit, etc. etc. How can they afford to pay more for thinngs? I believe most of the money is finding it's way into bank coffers, where it sits and collects dust. Instead of getting lent out to consumers and investors, it's used shore up the bank's balance sheet.
Bryan- Your comment--"All of this talk about hyperinflation is misplaced in my opinion. We have the strongest and largest economy in the world with the world's reserve currency. Hyperinflation isn't going to happen here. "
Depending on your definition of hyperinflation, I'd probably disagree with your comment for several reasons. Your picture makes you look young-I'm not. I never thought I'd see 20% interest rates and even HIGHER inflation or appreciation as I did in 70's-80's. Those of us well positioned made millions. I consider that as hyperinflation, especially in todays' world.
I'm also not sure we have the strongest economy in the world any longer and there is a lot of talk from other countries wanting to eliminate the dollar as the worlds exchange currency.
I'm too old and experienced to make a comment that it will NEVER happen. Never is a really long time and time will tell.
I've posted this before and will continue to post until someone comes up with better suggestion the following
1. Have one secured, insured entity with ALL free and clear property. This is your protection against DEFLATION or complete collapse.
2. Have HIGHLY leveraged entity with lots of properties and pray for Hyper inflation.
It is as simple as that. Add otther stuff like metals, food, water etc. as you feel the need. Rich
Praveen,
Leveraging is somewhat the word of the past. We liked Leveraging because history showed us that it was almost guarantied. However, if we learned any lesson form the past three, four years is that leverage, like everything else in life, is far from being guarantied. In a matter of fact, the reason that 1 in 10 household in America is upside down, is because we relied too much on leverage.
Yes, if inflation or hyperinflation for that matter hits, then yes, leveraging will see the light of Day again. With the world economies in such turmoil, who can tell?
Mitch,
The older post you inserted asserts that even if governments pump money into the economies, no one would be able to afford using it...
"When the Fed purchases that debt from the open market, liquidity is added to the system. That would normally be inflationary, but nobody is spending anything, hence the deflation. IOW, the money is out there, but it's not changing hands."
Kind of a strange assertion since when a government pumps money into the market (either through low interest or relaxing borrowing regulations) people use it.
The truth of the matter is that we now have shortage of products. No, we don't feel it because we don't buy as much as we used to, but companies don't stock that much anymore and manufacturers don't produce more than the market can currently bare. However, if the flood gates are open and people see the money coming, they will start purchasing. The producers would not be able to keep up since the demand for product will rise fast, thus creating shortage of products which will lead to inflation.
Normally, yes, but do you see that happening now?
The other thing people can do with money, besides spend it, is sock it away in the bank since they're afraid of what the future holds. That in of itself should create funds for the banks to lend, again adding liquidity, but they're not lending. So the money sits.
Ah, we're talking two different things now. One is government spending. The other is increasing the money supply.
You're correct that government spending stimulates the economy, but it does not change the money supply. If you simply take $20 out of the government's coffers and spend it in the private sector, the net change in the money supply is zero. IOW, money wasn't created or destroyed, it simply changed hands.
Now, when the government runs out of money to spend (pretty much a daily occurrence), they can either stop spending (God forbid!) or borrow money to spend (Yeah, baby, yeah!). So the government issues another $10 gazillion in treasury bonds and borrows the money... from us... if we have any. Now the government has more money to spend (on health care, B-2 bombers, paper clips, whatever), but it still hasn't changed the money supply. It just moved around again.
Now the Federal Reserve comes in. If they want to increase the money supply, they start buying all those treasury notes from the open market, putting money into the hands of the individuals, businesses, and institutions that hold them. Where does the Fed get the money to buy all these bonds? From it's magic pencil! It simply credits the accounts of the bond holders with a few taps of a computer keyboard. Voila, instant money!
Now we can go back to my post and evaluate what is happening with all this "instant money" that's being created. Sure, like you said, there will always be people that can't save a dollar to save their lives. As soon as that shiny new car or big screen TV hits the scene, they spend whatever they have.
But the number of people capable and willing to do this is far less than it was in the past. First of all, you need money or credit to buy these things. What happened to credit? Exactly. What happened to people's wealth (savings, home equity, income, etc.)? Right again. And just think, if you didn't own any US Treasuries for the Fed to purchase, you didn't get any of the "new" money. Darn it!
Mitch, I beg the differ when it comes to increase in circulation. When the government relaxes borrowing regulations and lower interest (Can you even do that anymore?) The banks borrow that money from the government. Where do the government gets that money? borrows it or print it. Now the banks have two options: lend it further at higher interest or store it in the bank as they do now to meet federal reserve regulations (unlike what they did before). Now, lets assume that eventually the banks will pass that cheap money to us. If that money is borrowed against treasury bonds, you're right, there is no additional money in ciculation. However, I argue that given the current state of the union, at one point the credit rating of the US government will fall so far that no one will be willing to lend us money. Left without any option, the government will start printing money.
Same thing goes for money spent directly by the US government. Eventually, it will get into a vicious cycle. Government spend money, people use to buy things with this money (No we are not Japanese... We will spend), shortage of product will create inflation which will cause the government to print more money. Now here is the bigger problem. Usually when the government spend money, it reflects on the GDP which create payroll which bring taxes, however, in this scenario, the government spends mostly on services and product that the government needs, not on product to export which in return strengthen our currency.
Eddie, I believe you're referring to the federal reserve as the government and they are not one in the same. For instance, member banks may borrow money from the fed in order to meet their reserves, not from the government (US Treasury). And the fed is the one that sets certain rates, like the fed funds rate and the discout rate, not the government.
Finally, you mentioned 3 times in your post that the government gets it's money by printing it. That is not how our system works and that was the basis for my original post in this thread. The last I read, only about one third of the US money supply exists in currency and coin. The Treasury prints money only to meet the demands for people who want to hold cold hard cash. Printing more money does not increase the money supply. The government cannot simply print money to pay it's bills. The government does not make money by printing it. Any bankers or economists here want to explain it another way?
My opinion:
Good: your property should hold it's value in an inflationary environment, unlike cash
Bad: insurance, cost of replacement systems like AC, water heater, tools and materials needed down the line will go up just as much as the cost of food and everything else.
Eddie- you aren't old enuff to remember those interest rates! I am. As I've posted before, the inflation during those times annually was ALMOST the same. If you own lots of real estate, you'll become a millionaire almost overnight, on paper.
Less people will be able to get qualified. That WILL BE the time to sell on owner financing, if you ever plan on it, imo. At least a 12-14% rate will look good on paper. I took back lots of notes at 11-12% back in those days for commissions, sales, etc. Rich
BR- if you want to do owner financing, that will be the time for sure. Need to have properties you can wrap etc., but it'll be a nice retirement plan, imo. Rich