With fixed-rate mortgage borrowing costs falling as Spanish inflation surges, real estate gets more sexy as an investment.
In October the Dutch bank ING announced it was reducing the interest on its fixed-rate in Spain from 1.5% to 1.4%, whilst consumer price inflation hit 5.5%, the fourth highest level in the EU.
If you are paying 1.4% interest and inflation is running at 5.5% you are paying a real interest rate (inflation adjusted) of -4.1%. Another way of looking at it is that inflation is helping pay your loan.
Inflation of 3% will reduce the real value of €100 to €74 in 10 years. So if you have an interest-only loan of €100,000 over 10 years, the real value of your loan will be €74,000 when you come to pay back the capital.
The investment attraction of property rises with inflation. It’s a ‘hard’ asset that cannot be inflated away like cash and many other financial assets, and rents rise with inflation, even in a country like Spain.
There are some incredible deals on fixed-rate mortgages around right now, as the example from ING shows. A fixed interest rate of 1.4% whilst inflation is already running at 5.5% just sounds crazy to me.
Central bankers and many economists argue that the spike in inflation we are seeing around the world is caused by temporary supply shocks brought about by the pandemic, and will subside. The ECB has said it sees no reason to raise interest rates in 2022.
Mario Draghi was able to cow the bond markets and ‘save’ the euro with his “whatever it takes” speech as the head of the ECB back in 2012 but taming inflation won’t be so easy. Governments and central banks are splurging like never before, and you can’t tame inflation by throwing money at the problem.
There’s only one medicine for high inflation, and there’s not the stomach for it anymore. If you think that high inflation is here to stay, one way to protect yourself is to buy real estate with a fixed-interest loan.