Inflation vs. Deflation—What’s at Stake for Real Estate
In the wake of economic uncertainty, real estate often serves as a shelter in the storm. However, the dynamics of inflation and deflation bring their own set of challenges and opportunities. For real estate investors, understanding these economic conditions is crucial for effective decision-making.
Inflation’s Impact on Real Estate
Personal Story
Back in 1987, I took out my first mortgage at an astounding 11% interest rate. The mortgage amount was $68,000, and my monthly payment was about $647. Additionally, the purchase price for the townhome was $78,000. Fast forward to today, and that same property would sell for approximately $770,000. And, if we adjust for an estimated 2.5% annual inflation rate, the monthly payment of $647 would be akin to paying roughly $1,443 in today’s dollars. These numbers speak volumes about the long-term impact of inflation on property values and the potential for immense capital growth.
Property Values: In an inflationary environment, the cost of goods and services rises, and real estate prices typically follow suit.
Mortgage Rates: Inflation often prompts central banks to increase interest rates to cool down the economy. While the prime rate of 7.2% may deter some from diving into real estate, remember that inflation could make your existing debt cheaper in the long run.
Investment Strategies: Traditional rental properties may offer lower cash flow due to high interest rates. However, focusing on appreciating assets can be a savvy move. Finding an investment property that has cash flow today will be an incredible investment when interest rates reduce and values rise.
Deflation’s Impact on Real Estate
Personal Story
The high-interest rates of the ’80s might seem inconceivable now, especially for those who entered the real estate market in years of low interest. But economic climates change. What seems expensive today might be considered a steal in an inflationary future. Conversely, deflation could make today’s ‘reasonable’ rates look exorbitant. And remember, if a townhome bought for $78,000 in 1987 could appreciate to $770,000, imagine the possibilities if you adapt your investment strategies to the current market conditions.
Property Values: Unlike inflation, deflation causes the value of money to rise, leading to decreased demand and falling property prices.
Mortgage Rates: While deflation might seem like an ideal time to borrow due to lower interest rates, it can actually make existing debts more expensive over time.
Investment Strategies: In a deflationary environment, consider going for properties that generate solid cash flow rather than banking on appreciation. Stability becomes the name of the game.
Balancing the Act
Fraser Valley’s real estate market has its unique characteristics, impacted by local employment rates, development projects, and community growth. Weaving in the inflation-deflation debate into your investment or home-buying strategy can be a game-changer.
Leverage Locality: Use the localized market trends to buffer against broader economic swings.
Diverse Portfolio: Diversification is often preached, but seldom practiced to its full potential. In uncertain times, consider spreading your investments across different types of properties and financing methods.
Financial Advisors: Now more than ever, expert advice is invaluable. Collaborate with financial advisors who understand both the local Fraser Valley market and macroeconomic trends.
Final Thoughts
Inflation and deflation are two sides of the same economic coin. While we can’t control these macroeconomic forces, we can control our strategies and adapt to the currents. Let’s be proactive rather than reactive, equipping ourselves with the knowledge and tools to not just survive but thrive, no matter what the economy throws our way.
Whether you’re a seasoned investor or a first-time homebuyer in Fraser Valley, the more informed you are, the better decisions you’ll make. And as we all know, better decisions lead to a higher Return on Life (#ROL).
Fraser Valley Stats Package – August
Greater Vancouver Stats Package – August
STR (Sell Through Rate) Formula = Sales ÷ (Active Listings + Failed Listings + Sales)
Randy Dyck
Personal Real Estate Corporation
604-807-4366 or randy@eximus.com
