2011; The bumpy bit at the beginning of the roller coaster

//2011; The bumpy bit at the beginning of the roller coaster

We couldn’t have started 2011 with a greater shock than what is being described as the largest natural disaster in Australia’s history – the massive flooding that has impacted much of the nation with the brunt borne by Queensland. As a property investor considering what the future holds I feel a bit like we’re at the start of the roller coaster ride as the carriages are caught on the chain that drag it up the first rise with the anticipation of an exciting ride ahead.

Since the flood waters swept through the Brisbane CBD there has been a swell in the analysis of the effect on the economy with the media taking a largely ‘negative’ focus of inflation. As a property investor with a structured plan, inflation is a great thing. It means that the economy is doing well and history shows that when the economy does well so too does the property market.

On the way up…

As I have mentioned here before, any sound wealth creation plan looks to maximise short term opportunity but focuses on the medium and long term to create real wealth. Prior to the flood Australia’s future was looking very bright with (according to the RBA) a ‘once in 100 year’ terms of trade (value of our Exports minus Imports). A major impact of this has been our lowering unemployment rate as competition for labour increases, a skills shortage is particularly apparent in those required for infrastructure building projects. The reconstruction effort required as a result of the floods will only make the labour market much tighter creating even greater pressure on wages. As the cost of labour goes up, so too does the cost to produce goods and services in Australia derived from that labour, while imports become comparatively less expensive.

Other prices will rise in the short term such as food as Queensland produces almost 1/3 of the country’s fruit and vegetables (although the RBA is unlikely to take this into account when considering the measures of inflation) While some of our export commodities such as coal for example have already increased in price and likely to stay high due to the reduction in supply that we simply can’t make up. So while there is no doubt that the impact of the floods on the economy will be a reduction in our production (GDP) as a nation in the short term, it is also likely this will be made up in the next 12 to 18 months as a result of the reconstruction effort and increase in export prices, not just putting us back on track, but propelling us into an even more positive future. Of course the bumps in the ride caused by rising interest rates as a result of this inflation will cause some short term challenges for investors and home owners … unless you have structured your property investing business correctly prior.

… and up …

Keep in mind that as wages increase, so too does affordability, a fundamental factor affecting capital growth rates in housing with wages likely to outpace inflation and house price growth for the next one to two years. This is amplified in those areas where there are significant infrastructure projects occurring, especially in the non flood affected areas. Only time will tell the fullness of the psychological impact of the flooding in the demand for property in the flood zones, however we can be certain of the demand for labour and resources in the reconstruction and the impact on the rental market after thousands of people look for somewhere to live.

Australia is entering a prolonged period of wealth. The floods, while devastating, will cause a short term bumpy ride yet we can be excited about the many positives that will come with the reconstruction.

… hold on!

Wealth creation requires planning, discipline (courage to make the right decision, to do the right action at the right time), effort and time. Those who are truly wealthy have not followed the masses. We shouldn’t be fearful of what has occurred, rather identify the significant benefits that are before us and maximise the small window of opportunity we have today.