The Singaporean economy has been suffering from high rates of inflation for the last few years. The rise in inflation rate is a common phenomenon that every investor must come into grips with. Therefore to avoid its impact one has to cushion themselves against this slow, silent killer that eats away the value of money. Fortunately, investment in property is one of the best ways to curb inflation. You have also numerous choices in the types of property purchase which includes resale condos, new launch condos, under construction condos, commercial shops and industrial units. Houses appreciate and this does not mean they get better with time since they do not. In fact, houses wear out with time and require some repairs but still they beat inflation.
What is inflation?
In simple terms, inflation refers to a situation where there is plenty of money going around resulting in the falling of dollar value, which ultimately leads to increase in prices. For instance, if the government injects more money into the economy, the value of a $100 bill will be equivalent to say $80 bill before the printing of the new cash. A simpler example would be the cost of an item say in the year 1960 compared to what it costs right now.
Inflation is a common occurrence and no one can escape it. The only way to avoid its effects is to cushion yourself against it by being smart with your money.
Invest in Real Assets to Beat Inflation
- An investment in real assets that give real returns will help beat inflation. Of the real assets that is popular among investors is gold. Gold tends to appreciate in value during inflation contrary to the fall in the value of currency. Other excellent hedges against inflation include an investment in consumer goods stocks and commodities.
- However, real estate is the ultimate choice when it comes to the fight against inflation. In fact, during times of rising inflation real estate is always a good investment. It is a fact that land is limited and population keeps growing and this make real estate a perfect hedge against inflation. Demand for land keeps growing irrespective of the levels of inflation. Property value is also affected by future projects within an area. Therefore, an investor who will evaluate the future prospects on an area will definitely reap more benefits in the long run. In the case of property investment in Singapore, you must be watchful of where the new MRT stations are. The government is very transparent when it comes to infrastructure planning. With this, the most exciting will be the under construction Thomson East Coast Line which will benefit properties such as Thomson Impressions, Thomson Three, Seaside Residences.
How Property Investment Cushions against Inflation
- Inflation affects negatively most sectors of the economy but real estate is the only investment that behaves in a different manner. It reacts proportionately to inflation. When inflation sets in, property value instead of falling goes up and rents go up as well. Thus it is a good thing to own property.
- One of the best examples of the effect of inflation is to make a comparison between property prices in the year 2012 and now. A house that was valued at $100000 back then is now valued at $180000 or even more.
- The effect of inflation is not only felt of property value but it is also felt on rent rates. For instance, a house that was rented out ten years ago would bring in $1000 per month. However, due to inflation the rent rates were increased by $100 each subsequent year. This increase translates to more money in your pocket if you are a landlord irrespective of changes in prices. It is thus clear that inflation in a landlord’s best friend.
- A new launch condo is also affected by inflation such as labor cost, material cost etc. In the western part of Singapore, we illustrate using Clement Canopy as an example. Its land bid price is $615 per plot ratio and therefore Clement Canopy price to break even is between $1,100 to $1,150. Likewise for Grandeur Park Residences in Eastern Singapore, its land bid price is $761 per plot ratio and therefore Grandeur Park Residences price to break even is between $1,250 to $1,300. Difference between the break even price and land bid price will be labor cost, material cost etc which will increase gradually. Buildings constructed today definitely cost more than those built years ago due to inflation factor.
- It is important to note that inflation also affects other aspects linked to property such as taxes, income, expenses, and many others. Nonetheless, in case of inflation, property investors will benefit more since inflation favors real estate.
When Does Buying Property to Hedge against Inflation make sense?
Even though property is a hedge against inflation, it is never wise to venture into real estate business at any entry price. Property investment will only cushion you if you enter the market when prices are right.
At times it makes sense to buy now even if prices are high because prices will definitely shoot up in the future. It is also wise to consider the property’s affordability since it is quite a risk to service bank loans. When the entry price is high, the mortgage will also be high and the risk greater. You should therefore buy what you can afford otherwise you will risk losing all your savings.
How Inflation Affects Housing Loan
- Now that you understand that real estate is a hedge against inflation, it is crucial to get to know how inflation affects housing loans. In Singapore, most property purchases are financed using a loan.
- Inflation has a positive effect on loans borrowed. The actual value of the SGD during the time of borrowing is more when compared to the real value during the loan repayment. This is due to the fact that loan amounts are not adjusted for inflation and the beneficiary is ultimately the borrower of the money. Nonetheless, the effect of inflation will be felt through the increase in the interest rates. Interest rates always increase in proportion to the increase in inflation. This in turn increases the cost of borrowing loans.
How do you Plan for Inflation?
No one can avoid inflation but its effects can be minimized through proper planning. Every investor should plan their finances in advance so as to combat the effects of inflation. It is wise to anticipate inflation and plan for it. For instance, while budgeting for their housing needs, it is good to factor in an increase in prices of daily necessities. You should factor in an appreciation of approximately 5% every year in all food items.
When inflation sets in, one of the inflation-adjusted assets that can provide you with safety is real estate. The Singaporean real estate market has been booming since independence and it is expected that it becomes even better now that new developments such as the MRTs are reshaping its landscape. Inflation may not be avoided but its effects can be minimized by making good choices when it comes to investing your money. Proper budgeting and investing in real assets such as real estate investment will guarantee a safe nest for your money when inflation occurs.