At the tail end of one of the toughest and most unusual years any of us have experienced, there has been something that happened that has also happened many times before.
At the start of the pandemic, seemingly, the property sky was set to fall in ways that had never occurred before, according to plenty of naysayers.
However, professional property experts knew this was unlikely to occur because history had shown us the resilience of real estate time and time again.
So, here we are, with property prices having strengthened in most locations across the nation – contrary to some of the more absurd predictions that were bouncing around at the onset of the pandemic.
Plus, these upswings are just the beginning of more property price growth in the months and years ahead in my opinion.
Cheap money
It’s important to understand that the property market relies heavily on a couple of key metrics – which are supply and demand as well as credit.
With the economy looking so grim, the Reserve Bank has started printing money to prop it up, plus interest rates have dropped to once-in-a-generation lows.
The current cash rate of 0.1 per cent has been set to encourage people to spend, but it has also given everyone a pay rise via cheaper money which has improved everyone’s serviceability along the way, too.
Historically, the availability of cheap money has always followed an economic downturn, with property prices firming in the years afterwards partly because of it.
Inflation will also play its part in property price pressure, which might seem an odd thing to say given we’re in a low inflationary – and temporarily deflationary – environment.
This is because when coronavirus hit, everyone started saving money, which in return slowed the velocity of money down.
What I mean is if one person stops spending then that is another person’s income, which eventually has a knock-on effect when it comes to inflation.
However, this gives a false sense of what inflation is actually doing, because if we’re printing money and expanding its supply, but everyone is conversely saving, it becomes much harder to measure it.
As confidence returns, the velocity of money speeds up and low interest rates do their thing, we will see the effects of the expanded money supply, which will quickly devalue the dollar and create a high inflation similar to the 90s.
Like I said at the start, we have been down this road before.
Sure, the reason for the economic downturn is not the same, but the policy settings and end results are nothing new.
For example, in the recession of the early 1990s, the cash rate was reduced from an eye-watering 17.5 per cent to just 5.25 per cent in a few years to stimulate spending.
At the same time, inflation fell rapidly as the economy struggled, but within a few years that supply of cheap money saw inflation increase again to be 4.1 per cent by 1995.
Remembering that our current inflation rate is 0.7 per cent, the current super-low interest rate environment will ultimately increase inflation, which in turn will devalue the current debt held by the government and private debt holders such as property.
Long-term, it will further inflate property prices and wipe out the savers who are struggling to get on the property ladder because they won’t be able to save quick enough.
But those of us who have secured strategic property investments are in-line to benefit significantly – as long as they keep an educated eye on what has happened many times before.
