Without a definite date for a vaccine, we work with what we know
Further to our previous articles on the ongoing pandemic and the relationship to property, some things are becoming clearer.
Property values will fall for a period and then they will go up. By how much is anyone's guess and until we know more about when the pandemic threat will end, it remains foolhardy to be declarative.
However, what is certain is -
- Banks are less able to lend money as their capital bases are reduced by current events.
- More people will be unemployed for longer
- Governments will have spent, and borrowed, unprecedented amounts of money to protect the economy.
- With less confidence in the economy, there will be less demand for making large purchases.
- With little international travel for the foreseeable future, many businesses in Poland's larger cities will collapse.
We know all of this, we hear you say. And of course, you do. But an additional threat that we do not see being spoken about as much is the longer term threat of inflation.
Inflation is essentially the price of "things" becoming more expensive. Every economy needs stable inflation (say 2 %) and anything less or more than this is considered an issue in the worlds global centres. That's the simple explanation.
But what inflation also does is to reduce the value of your money. If milk goes up from 2 zl. to 2.50 zl. and your income is the same, then you can buy less milk. It has less value.
It has been posited that as governments borrow so much, they may have difficulty in repaying. They may decide to introduce a lot of inflation into the economy. By doing so, they make the value of the debt much lower, thus making it less expensive. This of course assumes that their economy grows in the meantime.
It also means that any money you have in your savings account also loses value.
As the costs of this pandemic become clearer, we can see that Governments are introducing more cash into the economy, again fuelling inflation.
To guard against this, many smart investors move their cash into what are called hedges, or safe havens, in the event of inflation. These are assets that traditionally mirror any rise in inflation. As inflation goes up, so does the asset.
Gold is one of these assets. So is Property.
To fight inflation, Central Banks traditionally increase interest rates thus making it more expensive to borrow and reducing demand. But if the Central Bank decides that it wants more inflation, it will reduce interest rates and allow more money to enter the economy. This will result in greater demand for, yep, you guessed it, property.
Further to that, if you borrow to buy rather than pay all cash for your property then the value of your debt will, over time, also go down, increasing the return on your cash investment.
We don't know yet if this is a route that the Polish Government will travel and as we have been saying, it is far too early to make a call on the direction of Polish property prices in the short term.
We do say, keep an eye on inflation. If you do want to invest, get mortgage approval to be ready so you can move quickly. And if you are going to move, do it with a long term view.
To see if you were successful at the end of your investment, calculate how much milk you can buy now versus when you finally sell.