Abu Qatada, Inflation and the Case for Residential Property Investment

Q. What have inflation and the tabloid’s nemesis Abu Qatada got in common?

A. Well, once you have got them in your system, they are very hard to get rid of.

Like the famous Islamic cleric, inflation seems to be endemic to Britain. We seem to have always had it and we can’t seem to get rid of it, unlike countries like Japan where inflation has been pretty much non existent for quite a while, and has even fallen for a few years.

Some commentators say that the UK could one day become like Japan – and we could see falling inflation and drooping asset prices. But I don’t buy that argument and here’s why.

The Age of a Population is Linked to the Inflation Rate

Japan has an ageing population.

In Britain we do too, but unlike Japan, we also actively welcome newcomers to our islands whereas Japan, as I found on my three visits there, is well, pretty much for the Japanese.

Migrants to the UK tend to be young and people who are young tend to have kids – thus keeping the UK’s population young. And many economists see a link between a country’s youthfulness and its rate of inflation.

Now, inflation expectations have – subconsciously at least – a lot to do with whether people buy houses, shares or stash their spare cash in things like safe bonds at the bank or building society.

Most experts (though not all) point out that only by investing in real assets like shares in companies and houses can you get a strong hedge against inflation in the long term.

Of course, shares can be more risky too (and in the long term we could all be dead).

A company has real assets – its stock, its factories or even it intangible assets like its people. Sure, these should all rise in line with inflation. But, the company can also seriously screw up and leave the shares you bought in it worthless.

Like many stock market investors, I bear the occasional scar!

Houses or Shares as an Inflation Hedge?

Buying a house is potentially less risky than shares.

But even here, there is risk and house prices can fall hard if the local economy takes a big hit. Many parts of the UK are seeing falling house prices right now for this very reason – with Northern Ireland the worst hit area of the lot.

And according to one study I have read, the reason young people are delaying entry onto the property ladder is not because the mortgage loans are not there*, but because they think house prices will fall further and they can get a better deal later on. (I think it depends where in the UK you are, but I agree with our young folk that in some areas house prices definitely have further to fall. (*The lack of mortgage availability seems a fallacy as 90% plus loan to value first time buyer mortgages are widely available to folks with good credit ratings and they come with application fees well under £1,000)).

A Man Walks Into a Bank……….

But here is the big difference between shares and property:

A man walks into a bank and asks for a £100K loan to buy shares. He’s politely shown the door.

A man goes into a bank and asks for a £100K mortgage loan to buy a house. He’s shown a seat, asked to stay for a chat and maybe even offered a coffee.

And there are two other big differences too.

As landlords know, interest on loans used to buy property as well as the fees associated with setting up the mortgage are deductible against the rent for tax purposes. Plus, unlike a pension, they will not be forced to buy an annuity on their house or houses.

All this is obvious, but even for experienced readers, sometimes I think its worth restating the obvious.

Plus, I was keen to get mention of Abu Qatada in my blog! Maybe the “Daily Mail” may contact me now.

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