You’ve no doubt heard the stories of people struggling to make ends meet in an inflationary environment. You’ve heard of hyperinflation in places like Argentina. This is a place where inflation is currently averaging 42.6% per year. Inflation in Argentina has been running between 25% and 52% over the past 5 years. Venezuela’s inflation is currently running at 3000%. Prices are rising so fast, that quotes for services are only valid for less than an hour. Prices are increasing at a rate of about 1% per hour in order to maintain pace with the devaluation of the Bolivar.
When you are in an inflationary environment, prices change fast. People become conditioned to the idea that prices are constantly changing. They know that they can never get ahead really. All they can hope to do is tread water.
But this raises the question of what are things worth?
We’ve grown accustomed to knowing what things cost, when our reference point is dollars. But separating the notion of price and value is sometimes a little difficult when the price changes frequently.
Has the value of a clay brick changed from one week to the next? Not really.
Has the value of a 2×4 piece of lumber changed from one day to the next? Not really.
Has the value of a chicken for dinner gone up? Not really. It contains the same amount of calories as it did last week.
But we’re increasingly seeing prices change quickly. So quickly in fact that suppliers are often willing to quote a price for only a short period of time.
Lumber quotes are only valid for half a day.
Chicken prices have surged nearly 100% in the past year. Lumber is up by a factor of 5.5 times. Fuel prices are up since the beginning of the year. This is largely due to a fall in domestic production. Higher energy prices definitely have a ripple effect through the economy. But a gallon of gas is not worth any more today than it was six months ago. It may cost more dollars to purchase, but it’s no more valuable than it was six months ago.
In my home city of Ottawa Canada, the price of a single detached residential home has gone up an average of 42.3% since this time last year. Let’s have that number sink in for a moment. 42.3% price increase for a single family home since this time last year.
Will this price stick for the long term? Is this the new normal? That means that prices have increased by $221,000 in the past year. That comes to a price increase of $605 per day, or a price increase of $25 per hour. When you consider that a work day is 8 hours a day, 5 days a week, the price increase comes to $105 for every hour of the work week. Most working people don’t earn $105 an hour. Even if you did earn that much, you would have to put 100% of your income towards paying only for the price increase.
As a real estate property owner, you look at these asset price increases and feel good. But as someone who is servicing increasing debt levels if you’re buying in the current market conditions, the prospect can seem daunting. It’s all good until interest rates rise just enough to make the affordability of that massive mortgage loan problematic.
In the world of commercial real estate investing, these rapid increases in prices tend to favour landlords. Higher housing prices make it more difficult for tenants to transition from renting to home ownership.
But when everything is going up in price the key question is whether rents will increase fast enough to keep ahead of increasing expenses.
Prepare to live in a world of very fluid pricing, and try to figure out what that means for the prices you’re going to set in your business.