10.3 Deflation

In an environment of deflation - the two main characterisitics of deflation are:

• that, as prices fall, interest rates keep going down - partly becasue banks engage in fierce competition to find creditworthy borrowers - and
• asset prices fall, forcing people to sell at a loss to meet debts.

As long as house prices continue to accelerate, residential property is one way of beating low inflation. But it won't last and you don't want to put all your eggs in one basket. As long as you get an interest rate above inflation you still want to keep some money in cash. Even with low interest rates you may still want to invest in certain types of interest-bearing assets such as government bonds. However, the main priority for a private investor is to sit tight.