8 – Deflationary Cycles in Real Estate: The Good, The Bad, and The Opportunity
In this episode of Get Real Wealthy Season 4, Quentin D’Souza discusses taking advantage of a deflationary cycle in real estate.
Quentin says that the interest rates in real estate have risen over the past year, leading to lower real estate prices in Canada and the US. Deflation, the opposite of consumer price inflation, where prices for goods and services decrease, also has its own opportunities. People may delay their house purchase, but if selling property in a persistent deflationary environment, one could experience a decrease in equity. Deflationary effects may take six to eight months to materialize. Quentin explains that the currency supply influences deflation and inflation. An increase in the currency supply leads to an increase in prices, while a decrease in the currency supply results in deflation. For example, if the government restricts the bank’s reserves, there will be less money available to lend, increasing the cost of borrowing.
Deflation affects borrowers and lenders differently. In a deflationary environment, borrowers repay more expensive money. He adds that falling property values can be a disadvantage for borrowers. Quentin further says that as a real estate investor, it is important to consider the cost of interest rates during a deflationary period. He says that you should only consider purchasing properties at a discounted price if you can maintain a cashflow-positive position. He adds that deflation can become a self-reinforcing cycle and punish all except borrowers. The federal government, as the largest borrower in the country through its national debt, may also be impacted by deflation. With the recent increase in interest rates, the cost of the national debt has put the central bank in a negative position.
In conclusion, Quentin says that understanding deflation and its effects is important for anyone looking to invest in real estate. By considering interest rates, currency supply, and asset prices, you can make informed decisions and take advantage of a deflationary cycle.
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About the Author Quentin DSouza
Quentin D’Souza is the Chief Education Officer of the Durham Real Estate Investor Club. Author of The Action Taker's Real Estate Investing Planner, The Property Management Toolbox: A How-To Guide for Ontario Real Estate Investors and Landlords, The Filling Vacancies Toolbox: A Step-By-Step Guide for Ontario Real Estate Investors and Landlords for Renting Out Residential Real Estate, and The Ultimate Wealth Strategy: Your Complete Guide to Buying, Fixing, Refinancing, and Renting Real Estate.
