The Effect of Increasing Interest Rates on Real Estate Values
07 / 08 / 2018 — Carlos Rousseau
Increases in interest rates make borrowing more expensive for owners. However, higher rates can also be a signal of a stronger economy, meaning a stronger real estate market. When interest rates are higher, investors demand a higher return. This makes property less attractive, since the return on that particular investment is not changed. Increasing interest rates may seem unhelpful at first glance, but usually there are a lot of influencing factors that make these rates an indication of something better in the long run.
Why Do Interest Rates Rise?
Interest rates change due to a variety of factors. Inflation is one of the bigger factors, and often causes consumers to worry that their money will be worth less in the future, and they will lose purchasing power. Interest rates increase to balance out the perceived loss. Bond markets also have an influence on interest rates. Increased supply often leads to higher interest rates, because issuers borrow at higher rates based on supply and demand. When bond demand decreases, interest rates also rise because issuers offer investors higher return to raise capital.
Economic growth can also cause interest rates to rise. As the economy grows, rates rise to prevent economic overheating. This rise in borrowing costs may seem bad at first, but it might be an indication that the economy is doing well, and consumers are finding more and better jobs, allowing them to buy homes and make investments. The overall benefits usually outweigh the increase in interest.
What It Means for Real Estate
Interest rates are never the only thing that changes, so all the other factors have to be considered as well. Inflation is often the biggest driver of changing interest rates, and while an increase in interest rates might reduce future returns, inflation will usually also increase the value of the physical property. This means that the overall result can be positive, and real estate is one of the biggest investments even in periods of rising rates, because inflation helps balance out the negatives.
Interest rates and mortgage rates are only one way to determine property values. Focusing on these rates is important because they do have a direct impact on real estate prices an ones ability to buy a home. Still, it is important to understand that changing interest rates affects lots of aspects of real estate. They affect availability for capital, demand for investment, and returns on substitute investments.
When interest rates rise slowly and steadily, the may not have a huge impact on housing prices. When wages increase alongside this rise, it’s better all around. The hope is that a trend in rising interest rates means a better economy all around, offsetting any increase in housing and helping real estate values benefit the consumer and the investor.