House values in the setting of high inflation
House values in the setting of high inflation
Would house values in the setting of high or unexpected inflation necessarily rise? I have heard discussions about low rate mortgages serving as hedges against this scenario, but would seem like a paid off house would be a better asset in this scenario. How did house values fare in the early 80s when we had high inflation?
Re: House values in the setting of high inflation
The price of any item can rise or fall against the broader trend. But yes, you'd typically expect home prices to rise with inflation.am wrote:Would house values in the setting of high or unexpected inflation necessarily rise?
Yes, because a fixed interest rate does not rise with inflation. It's fixed.I have heard discussions about low rate mortgages serving as hedges against this scenario,
If you have a fixed-rate mortgage on your house, you get the benefit of the fixed interest rate AND any price appreciation of the property. Having a mortgage is just owning a house, plus taking out a loan that uses the property as collateral.but would seem like a paid off house would be a better asset in this scenario.
Well overall. Someone else may have actual data.How did house values fare in the early 80s when we had high inflation?
Darin
Re: House values in the setting of high inflation
Long-term, house values track inflation reasonably well, historically increasing just slightly over inflation. In the short term, there are many factors that can greatly influence the house price, particularly since buying a house is an extremely concentrated bet on real estate (not diversified).
Local factors - schools, crime, gentrification, traffic/noise patterns, nearby construction, fees/taxes, job market, etc. all can change the equation. So can macroeconomic factors such as borrowing costs, availability of money, tax policy changes/incentives, state of the economy.
In general, I would say that a house is a reasonable hedge against inflation, as your housing costs won't be quite as correlated with inflation that occurs after purchase. Your utilities/HOA/insurance/taxes will all rise, but your financing costs will not. However, you were asking about the benefit of having a house value that tracks inflation (outside of the financing costs) - having the value of your house rise on paper doesn't really help you unless you sell it, in which case you will probably purchase another house that will also have inflated in value. The only benefit I see to this is if you either downsize or move to an area that has had less house price inflation. Well, I suppose if you die, it would be a benefit to your heirs as well.
Local factors - schools, crime, gentrification, traffic/noise patterns, nearby construction, fees/taxes, job market, etc. all can change the equation. So can macroeconomic factors such as borrowing costs, availability of money, tax policy changes/incentives, state of the economy.
In general, I would say that a house is a reasonable hedge against inflation, as your housing costs won't be quite as correlated with inflation that occurs after purchase. Your utilities/HOA/insurance/taxes will all rise, but your financing costs will not. However, you were asking about the benefit of having a house value that tracks inflation (outside of the financing costs) - having the value of your house rise on paper doesn't really help you unless you sell it, in which case you will probably purchase another house that will also have inflated in value. The only benefit I see to this is if you either downsize or move to an area that has had less house price inflation. Well, I suppose if you die, it would be a benefit to your heirs as well.
Retirement investing is a marathon.
Re: House values in the setting of high inflation
My parents bought a house in 1979 for around $115k and today it's worth about $1 MM. When they purchased, inflation was high and houses were moving with it. More dramatic, however, was that interest rates were skyrocketing as well. My dad told me how he essentially camped out at a mortgage broker's office and demanded that the guy lock in a fixed rate (probably around 10% or so) since rates were rising daily. So if you can get the double whammy of a house that goes up with inflation but a low fixed rate, that's a nice combination.
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Re: House values in the setting of high inflation
My parents bought a house in 1960 in Toronto-- comparable houses in Buffalo NY at that time were similar prices. And Cleveland (Shaker Heights)-- a comparable suburb.RenoJay wrote:My parents bought a house in 1979 for around $115k and today it's worth about $1 MM. When they purchased, inflation was high and houses were moving with it. More dramatic, however, was that interest rates were skyrocketing as well. My dad told me how he essentially camped out at a mortgage broker's office and demanded that the guy lock in a fixed rate (probably around 10% or so) since rates were rising daily. So if you can get the double whammy of a house that goes up with inflation but a low fixed rate, that's a nice combination.
That house in Toronto has appreciated by c. 50 times (US and Canadian inflation has been similar, and in USD terms the CAD is now 1 for 1). That house in Buffalo? Probably no more than 10 times-- or less. A house in Halifax or Winnipeg would probably have done maybe 10-20 times. One in Vancouver 60-80 times. Cleveland? I doubt more than 30 times.
A house in London, England? At least 50 times-- 100-200 times is possible. Halifax in the north of England? I doubt 25 times.
The conclusion is that you cannot rely on house prices to keep up with inflation. Houses are too location dependent.
See my next post though.
Last edited by Valuethinker on Fri Feb 08, 2013 11:08 am, edited 1 time in total.
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Re: House values in the setting of high inflation
You need to separate out the link between housing prices and inflation (not in any sense, predictable) vs. mortgages and inflation.
Neil Monnery - Safe as Houses takes you through the 800 years of data that we have for some countries
http://www.amazon.com/Houses-Historical ... ery+houses
Robert Shiller has the Herengracht Canal data since 1630 in Amsterdam.
The correlation between housing prices and inflation is not great. To the extent that household rents are linked to inflation then housing values should go up as well-- but it's not a perfect correlation.
HOWEVER
Inflation reduces the value of long term fixed rate debts. In effect, inflation goes up, interest rates go up (with a lag) but you as the borrower experience the upside of paying back in devalued dollars.
This is the real inflation hedging impact of home ownership-- paying back your mortgage in devalued money.
Neil Monnery - Safe as Houses takes you through the 800 years of data that we have for some countries
http://www.amazon.com/Houses-Historical ... ery+houses
Robert Shiller has the Herengracht Canal data since 1630 in Amsterdam.
The correlation between housing prices and inflation is not great. To the extent that household rents are linked to inflation then housing values should go up as well-- but it's not a perfect correlation.
HOWEVER
Inflation reduces the value of long term fixed rate debts. In effect, inflation goes up, interest rates go up (with a lag) but you as the borrower experience the upside of paying back in devalued dollars.
This is the real inflation hedging impact of home ownership-- paying back your mortgage in devalued money.
Re: House values in the setting of high inflation
Actually, it is a "triple whammy". You get to pay off the loan with inflated dollars.RenoJay wrote:So if you can get the double whammy of a house that goes up with inflation but a low fixed rate, that's a nice combination.
Jeff
Re: House values in the setting of high inflation
In addition, typically stock prices would rise with inflation as well. So, having a fixed mortgage at, say, 3%, is like borrowing money to invest at 3% margin. And if you have a timeframe of a decade or more, might be good idea. [of course, there are always those who would ask if anyone with a paid off house would borrow against it ... but that is orthogonal to this discussion, which specifically seeks to discuss why a fixed mortgage might be better than a paid off house]Drain wrote:The price of any item can rise or fall against the broader trend. But yes, you'd typically expect home prices to rise with inflation.am wrote:Would house values in the setting of high or unexpected inflation necessarily rise?
Yes, because a fixed interest rate does not rise with inflation. It's fixed.I have heard discussions about low rate mortgages serving as hedges against this scenario,
If you have a fixed-rate mortgage on your house, you get the benefit of the fixed interest rate AND any price appreciation of the property. Having a mortgage is just owning a house, plus taking out a loan that uses the property as collateral.but would seem like a paid off house would be a better asset in this scenario.
Well overall. Someone else may have actual data.How did house values fare in the early 80s when we had high inflation?
- Porcupine
Re: House values in the setting of high inflation
Folks talk about "inflated dollars" all the time, but they are not all they are made out to be. Inflated dollars only make sense as long as the specific person has access to those inflated dollars. In other words, let's say inflation is calculated (by whoever is in charge of the quantification) at 5%. However, our dude with the mortgage (DWM) gets no raises for five years. As far as he is concerned, each dollar he gets in year five is as valuable as each dollar he gets in year one, granted he is hit by an inflationary environment and is saved from inflated housing costs. Am I missing something in this analysis?jsl11 wrote:Actually, it is a "triple whammy". You get to pay off the loan with inflated dollars.RenoJay wrote:So if you can get the double whammy of a house that goes up with inflation but a low fixed rate, that's a nice combination.
Jeff
- Porcupine
PS: I could have responded to Valuethinker but I chose yours as it was a shorter response!
Re: House values in the setting of high inflation
The scenerio you describe is certainly a possibility. However, as I recall the high inflation of the early '80s, pay raises generally took inflation into account. In fact, my employer gave everyone an extra 10% raise one year, as an inflation adjustment.porcupine wrote:Folks talk about "inflated dollars" all the time, but they are not all they are made out to be. Inflated dollars only make sense as long as the specific person has access to those inflated dollars. In other words, let's say inflation is calculated (by whoever is in charge of the quantification) at 5%. However, our dude with the mortgage (DWM) gets no raises for five years. As far as he is concerned, each dollar he gets in year five is as valuable as each dollar he gets in year one, granted he is hit by an inflationary environment and is saved from inflated housing costs. Am I missing something in this analysis?jsl11 wrote:Actually, it is a "triple whammy". You get to pay off the loan with inflated dollars.RenoJay wrote:So if you can get the double whammy of a house that goes up with inflation but a low fixed rate, that's a nice combination.
Jeff
- Porcupine
Jeff
Re: House values in the setting of high inflation
I do not get inflation raises, in fact my field is in deflation. In this scenario, is paying off a fixed rate mortgage advantageous? I recently payed the house off, with one of my arguments being: would I borrow money at 3.5% to invest - answer no!
Re: House values in the setting of high inflation
It is easy to see that having a mortgage that is less than the inflation rate is a good situation to be in.
As for the actual price of a house, it is not as easy to predict. The problem is that if mortgage rates go back up to 9.75% like my first mortgage was then;
1) A lot fewer people will be able to afford to buy your house with a mortgage rate that high.
2) Lenders will be very picky about who they will lend to since they have a lot more risk. Not only could inflation get higher, but if rates go lower then you will refinance. There really isn't a lot of ways that this can work out well for the lender unless they can load up the loan with a lot of fees that will make their total return look good if you do refinance in a few years.
3) A lot of people end up being locked in their house since it would make no sense to move to a better house if you had to get a new mortgage that is at a much higher rate than your current mortgage. this hurts the "move up" housing market.
4) It is gets harder to save up the downpayment for a house since your savings lose a lot to inflation each year.
These factors can make a higher end house a lot harder to sell. Entry level houses are a bit better since a lot of people who do not own homes are afraid that they will be priced out of the market and might never be able to buy a home if they do not buy right away.
A lot of it is relative though so you get used to having a different mindset during high inflation. When inflation was high it was not uncommon for someone to buy a used car and use it for a few years and then to sell it for as much or more as they paid for it. I knew several people who did this but because the dollar had decreased in value so much it felt like more of a curiosity than a great financial move.
As for the actual price of a house, it is not as easy to predict. The problem is that if mortgage rates go back up to 9.75% like my first mortgage was then;
1) A lot fewer people will be able to afford to buy your house with a mortgage rate that high.
2) Lenders will be very picky about who they will lend to since they have a lot more risk. Not only could inflation get higher, but if rates go lower then you will refinance. There really isn't a lot of ways that this can work out well for the lender unless they can load up the loan with a lot of fees that will make their total return look good if you do refinance in a few years.
3) A lot of people end up being locked in their house since it would make no sense to move to a better house if you had to get a new mortgage that is at a much higher rate than your current mortgage. this hurts the "move up" housing market.
4) It is gets harder to save up the downpayment for a house since your savings lose a lot to inflation each year.
These factors can make a higher end house a lot harder to sell. Entry level houses are a bit better since a lot of people who do not own homes are afraid that they will be priced out of the market and might never be able to buy a home if they do not buy right away.
A lot of it is relative though so you get used to having a different mindset during high inflation. When inflation was high it was not uncommon for someone to buy a used car and use it for a few years and then to sell it for as much or more as they paid for it. I knew several people who did this but because the dollar had decreased in value so much it felt like more of a curiosity than a great financial move.
- Optimistic
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Re: House values in the setting of high inflation
I wasn't sure if you were implying the house appreciated a lot or a little or kept up with inflation. Over 33 years, the CAGR of the house's price appreciation was 6.8%. The CAGR of inflation over the same time period was 3.6%.RenoJay wrote:My parents bought a house in 1979 for around $115k and today it's worth about $1 MM. When they purchased, inflation was high and houses were moving with it. More dramatic, however, was that interest rates were skyrocketing as well. My dad told me how he essentially camped out at a mortgage broker's office and demanded that the guy lock in a fixed rate (probably around 10% or so) since rates were rising daily. So if you can get the double whammy of a house that goes up with inflation but a low fixed rate, that's a nice combination.
Re: House values in the setting of high inflation
Hear, hear!am wrote:I do not get inflation raises, in fact my field is in deflation. In this scenario, is paying off a fixed rate mortgage advantageous? I recently payed the house off, with one of my arguments being: would I borrow money at 3.5% to invest - answer no!
Wage stagnation is a reality for many, and has been ongoing for a couple of decades with even more wage earners affected, at least in USA. Households have more income in a large (mostly?) part due to women entering the workforce.