Inflation
Calculating rental cash-flows
Inflation increases rents.
BUT inflation also increases the costs to provide a rental home.
Inflation increases property values
BUT inflation increases the cost of items to be purchased from the proceeds of the property sale.
After 10 years of inflation at 7.2%pa:-
● Wages double
● Rents double
● Property operating costs double
● Property values double
● Items purchased from the property sale proceeds double
● The purchasing power of each dollar halves
50 years ago:-
● $4 hot pies were 10 cents (7.7%)*
● $450k houses were $12k (6.2%)*
● $1,000pw wages were $28pw (7.5%)*
● $470pw rents were $16pw (7.0%)*
● $2.95 petrol litres were 40c (4.1%)*
● $110 ski passes were $6 (6.0%)*
* Average yearly inflation rate over the 50 years.
When Interest rates increase by 1% (from 4% to 5%)
interest payments increase by 20%(This is $132 weekly for a $400,000 property).
If rents and capital growth cannot pay compounding interest on owners' capital (after all other costs are met) rental properties are sold and renters lose homes.
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