Ok! Tell me something I don’t know!

About 20 months ago I attended an information (self promotion) seminar hosted by a well known and respected property analysis company. The person conducting the seminar was a well known, respected and often quoted in the media, economist.

It was around the time when the United State Federal Reserve (the equivalent of our Reserve Bank) was creating money out of thin air at the push of a button and calling it quantitive easing or QE. This is an intelligent sounding title which means nothing to the average punter but is actually about debasing the currency.

It is a practice which has been used for hundreds, if not thousands of years to devalue the local currency, in this case the US dollar. This causes inflation, which means that while commodity and asset prices increase, the real value of debt decreases.

The United States has a level of debt which is virtually unrepayable. The amount varies depending of which source you refer to, however, it is in the trillions, and increasing. In other words America is hocked to the eyeballs and there is no relief in sight.

This is why the US Federal Reserve is creating and exporting inflation to the rest of the world along with its destructive consequences. More on this later.

Back to the information (self promotion) seminar…

I asked the celebrity economist about the inflationary effects of the Federal Reserve’s quantitive easing and the possibility of rising interest rates to combat it and the effect it would have on the property market. From memory interest rates were around 1.75% lower than they are today.

He replied that QE would have no effect on inflation and that deflation was the real problem and Australian house prices would continue to increase! This was in 2009 when the market was surging along thanks to Kevin Rudd’s stimulus package in the form of the First Home Buyers’ boost.

The expert economist dismissed me when I pressed him on rising inflation and higher interest rates. After all what would I know about economics? I’m not a celebrity, just another ignorant real estate agent.

Anyway, twenty months and seven interest rates rises later, it seems inflation is now a global phenomenon and no more so than in Australia. The Reserve Bank (RBA) left rates on hold in May for the sixth month in a row. However, RBA Governor, Glenn Stevens, has hinted strongly that if inflation continues to rise (as it did in the March quarter) especially with the impending impact of the mining boom and wages claims by trade unions, there is a strong likelihood that interest rates will have to rise before too long.

This is a real concern for homeowners who have purchased over the past 2 or 3 years at relatively low interest rates, and borrowed 95% of the value of the property, at close to their maximum borrowing capacity. Not only have property prices fallen (and are still falling), but repayments have increased significantly thanks to 7 interest rate rises since October 2009.

Brisbane and Perth have the weakest property markets in the country at the moment. How this can be in the midst of the biggest mining boom in 100 years is a mystery to me, but then again I am no economist.
However, the good news is, if you have owned your property for 5 years or more and are selling and buying in the same market, it is a great time to upgrade, because everything is relative. The more expensive property you are intending to buy is relatively cheaper now.

If you have borrowed up to your maximum to buy in the past 3 years, things are not so good. Taking into account fees, interest, stamp duty, etc, you may be facing a net loss if you sell today. Better not to sell if you can avoid it. Property after all, has always been a good investment over the long term, and should continue to be, so you need to be patient.

Still if you do really NEED to sell for financial reasons, better to take the pain now and at least be free from the stress of excessive debt, and the effect it can have on your health and happiness.

Next time – Negative Gearing, “the Sacred Cow”.

I’m interested in your thoughts so have your say….

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