Inflation on its head?

People ask me about inflation in the 70s and 80s, usually because they want to position themselves advantageously for the inflation they now anticipate. “The only solution to all the debt is to have inflation” they say.

But the inflation of the 70’s felt like deflation. Although retail prices and incomes were rising fast, real and nominal prices of investment assets were falling.  Most residential and commercial property prices were (as they are now) determined by people’s capacity to borrow. As interest rates climbed, their ability to service a constant loan size declined faster than inflation lagging incomes and rents could boost their capacity to service it. The same pressures lowered equity valuations, earnings yields ratcheted upwards and prices plummeted.

However for residential property buyers actual net borrowing rates were generally lower than inflation. With the tax relief available to owner occupiers in the 1970s, it was possible to pay a net annual interest rate on your mortgage of less than the annual rate of inflation.

Trouble was, there was loan rationing everywhere, even from building societies, and the building societies were only lenders to owner-occupiers High street banks wouldn’t lend on property for investment at all, and rarely for occupation.  In 1976 I was offered a detached freehold house in Finchley (NW London) arranged as four flats yielding £4,500 per annum, for £16,500 .

It was desperately cheap but I couldn’t find finance, which was of course the main reason residential property investments were so cheap.  Residential investment property prices were falling because there was credit deflation.  In those days I had three credit cards maxed out up to my combined credit limit then, of £6,500, for the purpose of buying residential property investments.

London auctions were stacked with properties yielding 25% but no buyers. Most auction rooms had rows of empty seats in 1976.

But it was standing room only by 1979.

So my advice is counter intuitive. Liquidate everything for cash. In the coming inflation, market rates of interest will overwhelm central bank interest fixing (look at Italian bond yields last week for an example of markets setting yields against central bank diktat), and rise to levels which force holders of assets bought with borrowed money, to release them into a falling market.

And cash, ie real, folding money, will be king again for a while.

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5 thoughts on “Inflation on its head?

  1. Same here Freddy, still in cash but several, repo, portfolios a month are coming to market here in nw England. eg 3 story Edwardian semi arranged as 4 flats yielding 19k, for sale 100k. Try to buy now for circa 72k? Or wait for more blood on the streets?

    Or maybe do a Martin Amis. I can see which way the wind is blowing but I do like blighty. I just have a feeling here that market clearing is being forestalled or even worse, prevented.


    • Kev, I really haven’t a clue, which is why I am in cash apart from some German residential property. Yesterday I bought more Swiss Francs against Euro. I don’t like the way the Euro has continued to fall against (even) the GBP…To my mind it is like buying the Swissie at last years rate. It has been fixed at the 1.2 level that long nearly. PPP is probably around 1.35 and so it is still ‘dear’at 1.2, but no ‘dearer’ than Bunds at -02%

      There are some obvious things which must happen, but the only way to profit from them is to knowing WHEN.

      …..and that can only be a guess and so we are talking of gambling

      ….but perhaps it always was

  2. Gluckliches neues Jahr, Friedrich. (Or shd I say Vince – thank goodness you didn’t choose Dennis). Do get in contact when next in London…
    Hope the investment year has treated you well, despite the Sinclair imbroglio.

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