The Power of Inflation

Inflation can be a cruel enemy but there is another way. In last week’s blog, I covered two different subjects. This person wanted to know the advantages of keeping or selling his home in NSW and also an investment strategy for the next 5 years while he was in Emerald working.

My comments on a suggested investment strategy caused quite a stir among my radio listeners.

What I basically said was:

This person, who is in the $80-$180 tax bracket could buy one of our $500,000 executive homes, borrow 100%, only contribute $80,000 over the next 10 years and pick up $600,000.

One of my radio listeners reckons that is ‘bullshit’ and that is okay. That is the reaction of most people, who do not understand the power of inflation. However, over the last 40 years, I have many clients who have retired owning half a dozen homes with no debt. Whilst inflation is a cruel enemy for most retirees, we make it our best friend.

Why is inflation the cruel enemy of retirees?

Let’s say that you retired today with one million dollars in cash. In 10 years time, it is only worth half that which means that your wealth is diminishing all the time. It is absolutely tragic, however, if you own property it is a different story. If you own six houses you will always have six lots of rent.

The average price of a house in Brisbane in 1972 was $15,000. The average rent was about $20 per week and the average wage was around $60 per week. Those things are still relative. The average price of a house in Brisbane today is $632,000 but having said that, this can be misleading, as the 5-bed investment homes I build today are generally far superior to the average home of 1972.

The homes might be bigger and flashier these days but the blocks of land are a lot smaller. Brisbane used to have mainly 1000m2 blocks of land, but to make services more efficient they now average about 450m2 but with more parks.

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What is the main cause of inflation?

A simple answer is that our Government keep spending money they do not have. How can they spend money they do not have? They just print more of it and in the process dilute the value of the existing currency in circulation.

A brief summary

You borrow money to buy a house. With inflation, the dollar value of that house (not the real value) will double in approximately 10 years but the amount you borrow actually becomes less as the value of your dollar diminishes. The difference between what you owe and the dollar value of the house is the equity that you create. This is how, with inflation, we just keep creating equity and creating wealth.

If you would like to know more about investment strategies to tailored to your situation, please contact our office to schedule a free, no-obligation consultation.

Steve Taylor

If you prefer to listen here is my radio interview on Emerald 4HI:

At the helm of Steve Taylor & Partners, Steve Taylor has been delivering expert advice and product knowledge to clients for over 30 years. Steve Taylor & Partners provide individuals, couples and families with the right strategies to create wealth and change their lives with solid bricks and mortar.