Thursday, October 28, 2021
Dear Your Overseas Dream Home Reader,
The stock market is a mess. Economic growth is weak. There’s fears of unemployment. And inflation is skyrocketing…
Sound familiar?
How about this: Gas prices are surging. Meat prices are also spiking. And the American central bank’s easy-money policies are blamed as one of main drivers’ of the high inflation.
Believe it or not, but I’m not talking about our current predicament. I’m talking about 1970s America.
It was a period when the inflation rate shot up from 5.7% to 13.5% in just four years, and wages and prices spiraled out of control.
In light of our current situation, it’s a period I’ve been reading up on.
One Baby Boomer’s recollection of this time spoke of his devastation at seeing his pension being decimated. When his dad retired in 1972, he was collecting a pension of $120 a month. It was enough to cover rent for two months. However, less than seven years later, the same pension check was only covering two weeks’ worth of rent in the same apartment.
It’s a powerful example of just how pernicious inflation can be. Even at rates that don’t look so high, continued over a few years, it destroys the value of your savings.
Now, we’re seeing clear signs that a new period of high inflation is here. This month, market measures of future levels of inflation have climbed to a decade high.
The Federal Reserve says that it will not let inflation get out of hand, and it’s preparing to tighten its monetary policy. It’s expected that increases to interest rates may come as soon as next year (another policy we saw enacted in the 1970s, when interest rates rose to nearly 20%).
As the saying goes, history doesn’t repeat itself, but it often rhymes…
And in recent weeks, most people will have had a real-world crash course in inflation.
What started as an abstract concept tossed around by economists and talking heads, gets pretty real when you’re shopping in Home Depot and supplies have doubled in price, or you’re filling up your car with gas that costs a dollar more per gallon than it did just a few months before.
I read a story recently that illustrates this perfectly…
When asked about inflation, students at the University of Florida showed no concern. That is, until, they found out the price of beer is up a whopping 70% from last year.
“That’s atrocious” said one student.
Students having to pay more to party isn’t something most people are going to care about, but the problem is it’s not just beer. The price of essentials like food and energy is also roaring higher. All over the U.S. people are having to make tough choices and cut back on spending.
But most people still don’t really understand inflation. They think it’s a natural phenomenon. Something to just accept.
Inflation is a product of a financial tool used by governments to pay off debt. Essentially, it occurs when money is created out of thin air, which causes the price of just about everything to rise. Following the multi-trillion-dollar pandemic stimulus, inflation in the U.S. is soaring. Producer price inflation just hit a record high.
And now, on top of that, intense supply chain backlogs and bottlenecks mean that goods aren’t reaching consumers, causing shortages and price spikes, adding to the inflation woes—an issue that’s set to continue into 2022.
Looking at inflation another way…
Rising prices also mean the dollars in your savings account are losing value. Your life savings are eroding away because of inflation. It’s why some economists call inflation a “stealth tax.”
But you don’t have to just accept it…
You can preserve your savings, and even grow them, by investing in assets that rise with inflation—and perhaps even rise faster than inflation.
How to Protect Yourself Against Inflation
For me, real estate is the perfect asset for this. People will always need shelter. The land, and building materials have a tangible value. Most importantly, values of homes tend to rise with inflation, and so do rental rates. Which means, whatever happens, the right piece of real estate offers you protection.
According to data from the U.S. Bureau of Labor Statistics, from 1967 to 2021 the price of housing has gone up 4.16% per year, versus an overall inflation rate of 3.93%.
If you bought a $100,000 home in 1967, it would be worth $901,165 today. This doesn’t account for any rental income you could have also collected, and over 54 years that would be a significant amount.
And remember, that’s if you buy ordinary real estate, in a matured market…
Take a global view, invest in real estate overseas, and you can hedge against inflation while also benefitting from buying in a market on the up.
Wishing you good real estate investing,
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Ronan McMahon, Real Estate Trend Alert
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