What Are The Odds in 2015: Inflation or Deflation?


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What Are The Odds in 2015: Inflation or Deflation?

This year, the world’s economy has experienced better GDP numbers and positive media commentary. However, despite all these positive optimism, the U.S. economy continues to be fragile, the momentum in Japan is also tapering off and the Eurozone appears increasingly vulnerable to recession as most countries continue to grapple with the challenge of taking appropriate fiscal and monetary policy actions in the aftermath of the financial crisis.

This situation is increasingly posing a great danger to both buyers and sellers, and tenants are also beginning to feel the heat.

“The starting point of all achievement is desire.” ~ Napolean Hill

What options do property investors have?

The question, therefore, that property managers should really be asking themselves now is; what are the odds in 2015: inflation or deflation? The good news though is that, based on the recent IMF global financial and economic forecast, GDP is likely to increase by 3.8 percent in 2015 (3.1 percent in U.S.). World gross product (WGP) is forecast to grow at a pace of 3.3 per cent in 2015 compared to 3.0 in 2014. But, what does all these mean for property investors? The likely outcomes of the global inflation or deflation on property buying prices, and how it may help frame property investment decisions in the Greater Seattle Area is something property managers must deeply understand.

This article, therefore, describes what many believe to be the highest probability outcome from the most outrageous financial mania in all history. Deflation hurts. It leaves investors with large debts – since the debt can, in fact, increase in inflation adjusted terms over time during deflation. A situation like this is considered disastrous. Property investors who like taking big risk will be penalized, and so are those that leverage up on debt. It is even more disastrous to property owners with large debts, particularly the ones using debt/leverage that are looking to rapidly expand their portfolios. Any forthcoming deflation will lead to falling profits and asset values. When this happens, most property owners will go bankrupt. What are the odds for tenants?

Those who are planning of renting a house or home must ask themselves whether that idea is really good during deflation. Now, any deflation shall bring with huge risks, but it could also be beneficial for those on fixed incomes with no debt since their money will be buying more – they will be paying low interest rates. Nevertheless, the answer to the above question will automatically depend on how much equity a property investor has. Normally, during deflation, commercial rates fall. In fact, a good number of tenants often go out of business because of falling profits. So, when buying or selling a property, it is wise to avoid the urge to go back to the bank seeking relief on the mortgage payment. Should the buyers pay all the cash and they also have cash to make tenant improvements, any foreclosure shall not be a threat in any case the property gets into trouble.

The strongest negative impact of inflation on housing prices involves the interest rates on borrowed money. High interest rates make money more expensive to borrow. In response, people tend not to borrow as much as they would have under normal situations. High interest rates often make home buyers to coy away from borrowing any money at all. In some cases, lenders may tighten lending standards. When home buyers start to shy off from borrowing money because of high interest rates, fewer buyers fill a housing market and this will automatically depress housing prices.

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