What does inflation mean for property investors?

Australia is like a balloon…

It’s also quite similar to a football. Or, you could even think of it as one of those blow-up pool unicorns.

Ok, by now we’re sure you’re either thinking we’re crazy, or plain weird – or both!

The more you blow up a balloon, a footy or a plastic pool toy, what’s going to happen?

Eventually it’ll get to the point where it explodes – capitulating into a sorry shape, failing to live up to it’s useful purpose. We don’t want to be lounging comfortably on our pool unicorn, for it to blow up, do we?!

When you blow up said object, what are we doing?

We’re INFLATING it.

Yep, the more something inflates, the more likely things are to go badly. Does this remind you of a certain oddly shaped, large nation you may live in?

Ok, so you get the point, Australia is going through some economic inflation at the moment. So, other than blowing up a ball, and it eventually exploding, what exactly does inflation mean?

According to our dear friends at the Reserve Bank of Australia (RBA), inflation is the economic event that occurs through increases in the prices of goods and, due to changes in supply and demand – our two nearest and dearest economic indicators.

Across Australia, we’ve seen the effects of inflation in each and every facet of life – whether it be heading to the supermarket for your weekly grocery shop, filling up your car, or even heading to Bunnings for a sausage in bread. RBA Governor Philip Lowe, as well as financial analysis experts CoreLogic, have projected the annual inflation rate to hit 7% by the year’s end, meaning that on average, life has become 7% more expensive over the last 12 months. Price increases have been hitting everyone hard – proving the fact that we’re going through some heavy inflation. It’s not just across Australia though, inflation is hitting just about every other country in the world too, no matter their financial or social situation. Recently countries like Turkey and Sri Lanka have seen massively high inflation, at almost 80%, causing a burst of their economic balloons.

That being said, typically, a bit of inflation is good, the RBA likes to keep things in the range of 2% to 3% per year. It keeps the economy going, ensures people are spending money, and fosters growth along the way. Much like your footy, or pool toy, we need to pump some more air (or money) into things as we go along – just not too much though, as we’ve seen in other parts of the world.

Why is inflation occurring?

Over the last couple of years, we’ve seen major global economic changes – impacting each and every person. Across Australia, with lockdowns, isolation orders and an increase in strain on the health system, government spending went up, and interest rates went down. Ultimately, through schemes like Job Keeper, policymakers wanted the economy to stay on its feet by ensuring people could still spend money. Off the back of this though, extra money in the economy meant that demand rose, and in turn, so have prices. Paired with massive labour shortages, this has sparked inflation leading us to the point where we are today.

SO, as a property investment enthusiast, you’re probably wondering…

What does this mean for me as a property investor?

1. The Cost to build is rising

   As you may have seen, building companies, large and small are going under due to increased prices. The big projects they signed off a couple of years ago are now costing SO much more to build, meaning things just can’t be done.

   This further shortens the supply of new properties, making it all the more necessary to have the procedure in place to find a quality property in a great location.

2. Interest Rates are going UP

   To correct for inflation, whilst also moving away from the emergency COVID levels, the RBA’s cash rates, and therefore all interest rates, are on the rise. Rising interest rates make it more costly to borrow money, therefore making people less likely on the whole, to purchase.

   In turn, this lowers demand and helps to curb inflation. For property investors, this makes it all the more important to have a buffer in place to help ensure that you are in control of your finances as the economy returns to equilibrium.

3. Rental yields are rising With increases in prices across the board, as well as skyrocketing demand, rental yields are continuing to rise. The national average rental price has increased by just over 10% in the last year alone. This highlights just how beneficial it can be to have a quality property that your tenants love – as people are really willing to pay.

Despite the uncertainty that surrounds inflation, rising interest rates and the property market, at the end of the day, investment is about one thing: long-term strategy.

All of these things aside, there’s nothing that will outweigh having a strong tailored plan to help you on the way. Economic hiccups alongside shifting supply and demand will only go so far – it is consistency and strategy over the long-term that will provide you with the best outcomes. As they say, the best day to invest was yesterday.

Want to chat more about how we can help you to smash your financial goals? Reach out HERE, or give us a call on 1300 776 735 – we’d love to hear from you!