Borrowings invested in property is the best hedge against inflation

Isnt it similar to saying savings left idle in bank account is eroded by inflation so the opposite is to borrow money and given that house prices generally at least rise (with inflation) then you are well hedged against inflation if those borrowing are invested in property.
 
Hi cremeegg

Would you expand on the point, with examples, so that we can tease it out.

Thanks

Brendan
A property bought today for €100k will have a nominal price of €265,330 in 20 years time under inflation of 5%. (100 x 1.05^20)

A loan of €100k taken out today, assuming no capital repayments, will have a nominal amount outstanding of €100,000 in 20 years time.



As a benchmark a salary today of €28,571 (i.e. €100k / 3.5) will be €75,808 in 20 years under the same inflation.
 
What about the interest payments?
That is irrelevant to the underlying point.

Though of course in practice it is an important question. The utility of owning the property may offset the interest payments. Whether that is rental income or just benefit of using the property, living or working in it.
 
A property bought today for €100k will have a nominal price of €265,330 in 20 years time under inflation of 5%. (100 x 1.05^20)

I think you are conflating different issues.

A property bought today for €100k will be worth €265k in 20 years if property prices rise by 5% a year.

You could have inflation of 100% over a particular period with a fall in property prices over the same period.

You could borrow €100k today and find that interest rates take off and exceed inflation. Interest rates for investment properties are about 4.5% at the moment. That is a lot. They could well rise higher.

Rents will probably exceed interest rates.
 
It is better to invest in either property or equities rather than to leave your savings in cash. Your property is more likely to keep up with inflation than cash + interest on that cash.

But investing in property or equities carries risk. I believe that, for most of us, the potential returns justify the risk comfortably.

But borrowing to invest in property or equities magnifies the risk.

It will work out well a lot of the time.
But when it does not work out, it causes such financial devastation to the investor, that I have concluded that one should not borrow to invest in either property or equities.

Brendan
 
Lots of folks invested in leveraged BTLs in 2007 and that hasn’t worked out too well.

Predictions are always difficult, especially about the future.
 
The stock market generally rises as well. However, both are risky and subject to periods of decline.

A proper hedge would likely imply when inflation is low or negative you wouldn't want to be invested in it.

Not to fly too close to matters of house prices but the logic of property bring a good hedge in a period of (stag)flation may not hold. Rising interests and low growth suggest repayments capacity will be stretched as well. Not a good combination of you're requiring near 10% capital appreciation.

From a local market perspective I haven't seen any evidence on the tide turning on investors exiting the market.
 
Lots of folks invested in leveraged BTLs in 2007 and that hasn’t worked out too well.

Predictions are always difficult, especially about the future.
You shouldn't believe everything you read. Really, the sound of people who experienced negative equity in 2013 onward has banished all rational discussion of housing.

I purchased a BTL at the height of the market €250k with a 10% deposit. I borrowed at ECB +0.75 and the investment has been cashflow positive ever since. Today it is generating a very decent return and worth almost what I paid for it.

Had I lived in it since, my repayments over the last 14 years would have been less than I could reasonably expected at the outset.
 
But borrowing to invest in property or equities magnifies the risk.
For property at least its not the borrowing that magnifies the risk, its the possibility that you cannot meet the cashflow.

And today you can borrow on a long term fixed rate, that is unusual, in Ireland at least, it makes property invest very attractive.

€300,000 over 30 years at a fixed rate of 3% is €1,260 a month. It is unusual that you have that much certainty about an investment. At 5% the repayment is €1,590.

The price you pay for an investment property, known, the finance cost over 10 years, known. The rent you will collect day one, known. The only uncertainty is changes in the rent into the future.
 
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I think you are conflating different issues.

A property bought today for €100k will be worth €265k in 20 years if property prices rise by 5% a year.
Yes.

You could have inflation of 100% over a particular period with a fall in property prices over the same period.
I am not sure I follow. Are you saying that inflation generally could be 100%, but property prices might fall against that background.

Obviously property does not have to move in lock step with broad measures of inflation, however both inflation generally and property prices are connected to wages, both as cause and effect. Higher wages means more money driving inflation usually including property prices, higher prices driving wage demands.

You could borrow €100k today and find that interest rates take off and exceed inflation.
Yes and in the past this was a concern, however interest rates were always only one part of the repayments on a C&I mortgage.

Today however you can borrow at 10 years fixed. This is a significant development.

Interest rates for investment properties are about 4.5% at the moment. That is a lot. They could well rise higher.

Rents will probably exceed interest rates.
Yes
 
For property at least its not the borrowing that magnifies the risk, its the possibility that you cannot meet the cashflow.

And today you can borrow on a long term fixed rate, that is unusual, in Ireland at least, it makes property invest very attractive.

€300,000 over 30 years at a fixed rate of 3% is €1,260 a month. It is unusual that you have that much certainty about an investment. At 5% the repayment is €1,590.

The price you pay for an investment property, known, the finance cost over 10 years, known. The rent you will collect day one, known. The only uncertainty is changes in the rent into the future.
Thousands thought like above, reality bit and the rent didn't get paid. That put paid to above scenario in an awful lot of cases.
 
The point is the following. High inflation reduces the real value of cash balances on deposit. So €100k today is worth €75k in today's money after three years of inflation totalling 25%.

Meanwhile if you buy a property for €100k today you still have a property in three years.
 
For property at least its not the borrowing that magnifies the risk, its the possibility that you cannot meet the cashflow.

And today you can borrow on a long term fixed rate, that is unusual, in Ireland at least, it makes property invest very attractive.

€300,000 over 30 years at a fixed rate of 3% is €1,260 a month. It is unusual that you have that much certainty about an investment.

The price you pay for an investment property, known, the finance cost over 10 years, known. The rent you will collect day one, known. The only uncertainty is changes in the rent into the future.
BTL borrowing with 100 % morgage would sure magnify the risk,so maybe keep it down to the"sound sleep level"say 65 or 70% of the value of the property being bought and use cash for remainder.I bought BTL house in 1978 and i sure wish i could have had access to a 30 year morgage like cremeegg, s e.g. above.The repayments would have been a lot smaller from day one and they would have evaporated over the next 30 years.I always thought of it as me having no repayments as the rental income was used for the repayments.It is a long term investment but after 20 years i had a valuable asset morgage free.With a variable rate morgage the equity increased with house price inflation over the years and the equity also increased because a portion of the capital was being included along with the interest payments each year thus reducing the outstanding amount of the morgage.Another small plus on the tax side was being able to claim the interest rate on repayments against the rental income.So in my humble opinion and from my bit of experience i would have to say that borrowing for investment property is one of the best if not the best hedge against inflation.
 
You shouldn't believe everything you read. Really, the sound of people who experienced negative equity in 2013 onward has banished all rational discussion of housing.

@cremeegg

Would you believe the Central Bank statistics from 2015?

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There were €26 billion in buy to let mortgages outstanding, of which €8 billion were in arrears.

There were 30,000 accounts out of 138,000 accounts. That's 20%.

A further 19,000 were restructured and no longer in arrears. That's 14%

So at that point in time, 34% of those with mortgages on buy to lets were suffering stress. Their credit records were ruined.

It could well be 40% or even 50% were in arrears at some stage during their mortgage.

I am guessing that half of these were on tracker mortgages so the repayments were relatively low - probably lower than when they took out the mortgages.

The other half probably did ok and were glad they borrowed to invest in property. They are a bit richer now.

But many lives were seriously damaged by borrowing to invest.

It is not a theoretical issue about the discomfort of negative equity. It's lives ruined.

I will repeat my belief that investing your own funds in property is better than leaving it in a cash deposit. But borrowing to invest in property is risky.

Brendan
 
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