Dispelling those inflated expectations

Monday 29 March 2004

Q. In all the discussions in your column on investment in residential property, no one has really assessed the effect of inflation on property prices.

I am in a somewhat unique position to do this, through living in the same house for some 36 years, in what is best described as a "leafy outer Auckland suburb".

I bought the house in 1968 for $19,000 - an apparent ba

By The Landlord

rgain when set against today's values.

But what many don't realise is that since then inflation has been over 1000 per cent. So when the consumer price index is applied to that $19,000, it translates into about $230,000 in 2004 dollars.

The present value of the house is about $300,000, which means that in real (inflation-adjusted) terms the compound capital gain over the 36 years has been less than 1 per cent a year.

The conclusion is that those now leaping into the housing market expecting massive capital gain are unlikely to get it.

It is true that in inflationary times, borrowing heavily and waiting for inflation to reduce the real cost of debt was a great way to make money. But this doesn't apply now when low inflation removes that cushioning effect.

Instead, we have a situation where the downside risk can well outweigh the perceived benefits, which are based on a distorted view of the past history of residential property investment.

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