what do you guys think about this? http://gonzalolira.blogspot.com/2011/02 ... -real.html

The thesis is interesting and probably true. But I think the story is a bit more complex because real estate prices during inflation depend on how the real estate is financed. To the extent that real estate is financed with fixed-rate debt, high inflation will drive down real estate prices just as the blog suggests. To the extent that real estate is financed with variable-rate debt, high inflation won't affect nominal real estate prices. To the extent that real estate is financed with cash, high inflation will drive real estate prices up.The core issue is: in an inflationary environment (i.e., one in which people expect a given unit of currency to purchase a declining quantity of goods in the future), what do people do with their cash? The answer is to move it OUT of the inflating currency and into an asset that earns money at a rate that tracks inflation or that is tied to a non-inflating currency (assuming we don't have global inflation). Certainly, gold and other commodities might be one option. But other long-term tangible assets -- including real estate -- can work too. If one assumes that people will always spend a certain % of income on housing, then money flowing to real estate will track inflation and real estate will remain a good long-term investment (as long as one isn't forced to sell in a market dominated by scarce/costly fixed-rate mortgages).

I agree this guy sounds logical - why should house prices necessarily rise in a painfully inflationary environment? This is about the really real stuff, like food and water and heating.Inflation is horrible, pernicious, sedulously poverty-making, riot inspiring, human suffering inducing (can anyone think of some more words) etc ... leaving rates low will have an inflationary consequence and already is especially in poorer countries where people are suffering. The core issue is not "where to put the cash" the core issue is to try to mitigate the inflation we will experience by raising rates now, that way poor people will be able to afford a loaf of bread and water, but rich people might lose some equity in their houses. So, I wonder whether they will be raising rates? Who usually wins - the rich or the poor?

I also agree that this guy has some points. In addition to available credit, I also think house pricing is a function of people's expectation to a very large degree. For example, house price has been skyrocketing in some well developed areas in China (especially Shanghai and Beijing) along with the inflation. In fact, I would say house price there rises much faster than general inflation (which already rises rapidly).

There's a much deeper problem occurring here which is that we don't normal inflation. In "normal" inflation, wages rise, too. That's what creates the destructive cycle in which which everyone develops a systemic belief in perpetual declines in the value of a currency. In normal inflation, price increases induce wage increases and wage increases induce price increases because there is too much money for both commodities and wages. In contrast, if wages don't rise, then the price increases induce declines in demand, declines in production, and a self-limiting process.What we have is a kind of displaced inflation in which QE in one country induces price increases in a subset of global commodities and wage increases in a subset of countries other than the country funding the QE. China, India, Brazil, etc. all have extremely high wage inflation whilst wages remain stagnant in the US & EU. The mobility of surplus capital and expectations about the effects of loose monetary policy can circle around the world.I fear the economic models of Western central bankers contain a fatal flaw in assuming that loose money creates a rising tide of investment that should refloat their economies. Instead, loose money creates a tsunami flow from one side of the world to the other.

The inflation situation in US is a bit unique because of dollar's status as world reserve currency. The expectation of inflation is high, but the real inflation is extremely low considering the amount of money Fed has printed. So in essence, US is exporting inflation to emerging markets. This is clearly not ideal for those countries, and may be also not ideal for US either. This is because such situation essentially weakens FED's ability to encourage domestic appetite for risk. In addition, this may force other countries to challenge dollar's status not because of they want to, but simply because of their inability to handle such huge imported inflation pressure - If they don't fight, their economy may collapse due to (hype)inflation.

QuoteOriginally posted by: zhouxingwhat do you guys think about this? http://gonzalolira.blogspot.com/2011/02 ... al.htmlT4A is right. What the article stipulates is a function of a number of explicit and implicit assumptions. From how the property purchase is funded to what are the collective expectations and perceptions of economic agents about future prices as well as about current and future regimes of the economy. What the article ommits is that rental contracts typically have an annual inflation adjustment clause. In any valuation model, this will tend to push property prices up, should such a high inflation scenario is anticipated.Another factor to consider is the spread between savings rate and lending rate. Typically the higher the inflation the higher the spread. In such a regime people earn less from their savings than inflation, and see property investments as a good alternative to protect their savings capital and interest income from inflation