Inflation might be slowing down, but that doesn’t mean the value of your money is increasing. In fact, your purchasing power is still falling at 6 per cent per year.
The latest data from the Australian Bureau of Statistics (ABS) showed that after peaking at 7.8 per cent in December, inflation has now cooled to 6 per cent annually.
While this means that the odds of a further rate hike in August might have been reduced, it still highlights the fact that you need to have your money somewhere that inflation can’t touch.
If you think about what an inflation rate of 6 per cent actually means, it is basically telling us that the currency is being devalued at a rate of 6 per cent every year. That means if you have $1 million dollars at the start of the year if it’s not invested somewhere, it’s actually going to be going backwards by around $60,000 each year.
That’s why you need to have your money parked somewhere that is ideally going to protect it from the impact of high inflation.
I like to invest in property as it can help hedge against the impact of the currency being devalued. When you buy real estate, you’re buying a real asset that is able to produce something.
For most people, there are two ways that real estate can produce an income. There’s the rent you receive from any tenants that you might have. And there’s also the capital growth that comes about by holding the asset over time.
While some of that growth comes by way of currency devaluation, there is also growth from supply outstripping demand. When you think about it simply, if you purchase some land in a place like Sydney’s Eastern Suburbs, there is always a steady stream of demand and there is no more supply.
Over time, that demand and supply imbalance will help keep drive values higher. Looking at conservative long-term growth figures of property prices increasing 5 per cent each year in blue chip areas, when added to the rental income, that more than counteracts the loss from inflation.
On top of that, property also offers you a range of other ways to add even more value. One of the great things about property is that you can actually manufacture equity in different ways.
You can, of course, renovate the property and increase its value. If you own land with development potential, you can subdivide or build and increase its value. You can even do other things like build granny flats or rent your property on Airbnb. Whatever the approach, the fact that you can do it means there is often far more upside than meets the eye.
Regardless of the asset class you want to invest in, it’s vital that it moves with inflation and protects you.
Because no matter what Government is in power, what form of currency is being used, or what’s going on in the world, our currencies will continue to be devalued.
Many wealthy people invest in real estate, not to make more money. Rather, they are looking at ways of protecting their wealth for future generations. They choose real estate because they know it is a real asset that can help protect them against inflation and it will still be around many years after they’re gone. The same can’t be said for currency.
If you are interested in the above, feel free to reach out to a Henderson buyers agent today for more information.
