Real Estate Market Fundamentals: Interest Rates

So, what happens to real estate investments when interest rates rise? With the global economy in its current state of disarray, inflation is trending upward at an alarming rate. It was only a matter of time before the reserve bank stepped in to flatten the curve with an interest rate hike. Keep reading to find out why interest rates rise and how they influence the real estate market.

Why Do Interest Rate Rise?

As with most other market factors, interest rates are influenced by the supply and demand for credit. When credit demand increases, the interest rates will rise, while a decrease in demand tends to reverse interest rates.

When more money is available to borrowers, the more money there is in the economy.

Inflation will also cause higher rates. When the inflation rate increases, the Federal Reserve will raise interest rates. Credit is more expensive, which reduces the amount of money in the economy.

Of course, the economy is more complex than our straightforward explanation. The Federal Bank needs to maintain a delicate balance to create a stable economy, and interest rates are a significant part of their strategy.

How Sellers are Affected by Rising Interest Rates

Real estate values are inextricably linked to the Federal Reserve’s interest rate. Higher rates make mortgages more expensive, which reduces the pool of available buyers.

For example, a seller trying to attract buyers to a $400,000 property would suddenly find that their pool of prospects could only afford $355,000 should the interest rates rise by 1%. If interest rates kept rising suddenly, it could still bring prices down even further. There’s nothing quite like uncertain interest rate hikes to spook investors out of the market, which creates more opportunities for savvy property buyers.

Profit could still be made on a property that has been held for a while, but sometimes, the best investment strategy may be to hold for a while longer until the market improves.

Raising Interest Rates and Property Values

Rising rates will affect cash flow and housing prices. However, a growing economy that keeps pace with mortgage payment increases may not have as much of an impact on real estate values. For example, if monthly mortgage payments were to increase by $240, but a strong economy enabled employers to deliver a 5% wage increase, the extra wages could offset the increased mortgage costs and keep property values stable. However, the economy would need to keep growing to prevent the market from plateauing.

Focusing on your financial goals and sticking to your investment strategy is critical to creating a profitable property portfolio. Housing prices invariably trend upwards despite occasional dips in the market like we are currently seeing. For this reason, buying and holding for the long term is almost always the key to successful property investment.

While property investment is a long-term strategy, buying the right property at the right price will improve your gains, but it’s not easy. Researching the market and analyzing the demographics of an area are time-consuming and challenging tasks. Fortunately, there are experts available who have made all the mistakes and are willing to teach you how to avoid them.