A tale of sweet teeth

When I was a child in the mid seventies, I remember being given 5p a day to buy sweets from the corner shop on my way home from school. And oh the choice was overwhelming! A packet of Spangles or Chewits? 2oz of Rhubarb and custard or a handful of blackjacks? If I saved up for a couple of days I could even afford a whole pack of Opal Fruits (remember them) or a Texan bar! The stressful existence of an eight year old consisted of these tough daily decisions which I must say I handled with aplomb and mastery. Unfortunately for me, my dentist has since been able to retire early to Florida because of all those personal challenges I faced in Cecil Road's sweet shop.

Now, you can't even buy half-penny chews. The 1/2p coin was taken out of circulation in 1984 because it was worthless. Soon I expect pennies will be history and 2ps - well! Those large circular brownish and oft terribly grubby tender will no doubt soon be relegated to the pages of Wikipedia history.

And why? All because of that nasty invisible force that we struggle to control (no not self discipline at the sweet counter) - INFLATION. Remember what 10p bought you 40 years ago (ok 20 or even ten if you insist on reminding me how young you are to my aged experience). Prices have risen, costs have increased = all because the pound is not worth today what it was a few years ago.

Recent discussions about UK debt and rising house prices all highlight the tremendous amount of public (and personal) debt that we as a nation now owe. (http://www.debtbombshell.com/ , http://www.ukpublicspending.co.uk/uk_national_debt_chart.html)

However, there is less discussion about the underlying rate of inflation, and the effects of QE which are bound at some point to filter through (even if right now much of that money is being held in banks to capitalise their assets).  For those of us involved in property, understanding the effects of inflation long term are significant. In fact they are mind blowing!

I went to a property investing seminar recently which examined the long term effects of inflation on house prices and mortgages, and the powerful correlation between holding property long term, and having debt secured against it (i.e. in the form of a mortgage).  So, just as you can no longer buy a 10p packet of chews, you can no longer buy an average property in the UK for £100,000. In fact, in 1984 if you bought a property for £100,000 it would now be worth a staggering £272,000. It would have grown by 2.5 times (and that's calculated simply on inflation figures - it does not take into count the overall market effects).

What if you had taken out an interest-only mortgage of say £90,000 then? Well, you would have paid monthly amounts to maintain the interest payments, but in comparison to the value of the house, the debt would now be 33% of the value of the property as opposed to 90% of the value as it was then. Give it some more time and 90k will be an average annual salary - it wont seem like the mind-bending sum of money it felt like when the mortgage was taken out in 1984.

Interestingly, house prices rise despite inflation, and the following graph shows REAL house price growth with the effects of inflation removed:

But although the value has risen, the debt has remained constant. And of course, over time, the debt effectively loses value (George Osborne knows this and is keeping very quiet about it). The fear is that as inflation rises, so too does interest rates. THAT's another story for another time.

The conclusion is, had I stockpiled my penny chews and perhaps taken out a small loan from a willing joint venture partner to fund the undertaking, not only could I have made a small fortune from the rising price of vintage confectionery, I could have profited handsomely because of the inflation on the debt reducing year by year.

And how might I spend that money? Well, just ask my dentist (when I saw his fees I did think I'd chosen the wrong profession).

That's what I call SWEET!