In the year to September inflation hit 4.9%, the highest in a decade, and mortgage rates have risen rapidly. As a property investor it is natural to be concerned about the impact on property prices and yields…and ask is the property party over?
Inflation
While the inflation rate has startled some investors, the real question is what are the drivers, and will it last?
- Shipping costs. By now we have probably all heard stories of the cost to freight a shipping container from Asia to NZ – rising from say $5k to $18k. That is certainly part of the inflation story. When Covid hit, my child hood friend who runs the shipping loan book for a US bank in Asia was suddenly under the pump…scrambling to deal with new builds that were being put on hold and the scrapping of older ships. As a result, tonnage in the industry was dramatically reduced. We know that ships are now being built again. But it takes 2 years to build a ship, and my shipping contact tells me that supply won’t materially change until 2023
- Increased demand for Durable Goods. No one predicted the massive surge in demand for durable goods, and thus the surge in demand for freight – see graphs below from Landfall Strategy. International and even domestic travel dropped off the edge of a cliff during lock downs. People had time on their hands, and the only way to get retail therapy was to sit online and let the fingers do the walking (for those younger than I guess 35, you won’t remember that Yellow Pages TV ad). Yes, the travel budget built up for many and its outlet was the new 65-inch flat screen, or fridge, or car (more on that below). Eventually international travel will open up again, and tourism will pick back up. That means the travel budget will stop getting stolen by durable goods purchases. What we don’t exactly know is when things will return to ‘normal’.