Interest Rate Rise = Property Price rise?

[gad]

I have just been reading the FAQ on the Navra Financial Services site where under the heading "What happens if Interest rates rise?" they say that when this happens, property prices also rise".

Is this correct? If interest rates start going up will property prices also go up accordingly?

If interest rates went up a couple of points I would have thought that a lot of people would be hard pressed to hang onto their IP's which would result in more properties on the market with pressure to sell resulting in prices coming down or at least going sideways...

If the above is correct, Int. rise = prop. rise, it goes against what I, as a novice PI, would have thought would happen.

Appreciate your thoughts.

 

[ChrisBarras]

Gad, I’m not sure on the effect this will have with IP's unless the investor has over capitalized.

Positive geared people might find themselves negative and the neg people will be writing off more on tax

What I think it will effect though is the family home of people that have bought the property at their lending capacity, all of a sudden they will need to find the extra money each week.

I.e. on a $250k loan @6.5% P&I over 25years the repayments are $421pw. Now if the interest rates went to 8.5 the home owner would need to find an extra $81 pw.
The investor on the highest tax bracket could write off $39 of this and only have to come up with an extra $42 out of his/her pocket.

Chris

 

[Bill.L]

Hi gad,

In my studies I see that during the last couple of property booms there have been interest rate rises. It is a question of which comes first. During the period 87/90 there were large interest rate rises and property appreciation. However eventually the high interest rates choked off property speculation.

In the current enviroment I don't see any interest rate rises on the horizon but when they do eventually turn up, there will probably have been a large rise in property prices that will continue for a while. The interest rates will get to a level that stops property rises. So my assessment is that The Navra FAQ is correct.

However I reserve the right to be wrong

bye

 

[Macca]

Warning: long post which is not advice, just my opinion.

In the past that has been correct, because interest rates have been raised to try to stop inflation. It was the inflation causing house values to rise, not the fact that interest rates went up.

Most of the present surge in real estate values is because of pressure from investors seeking higher returns than term deposits or the share market, plus the fact that because interest rates are low atm, a lot more properties became positive or neutrally geared.

If interest rates start going up, then repayments will go up and investors returns will be worse than they are now. The present surge is getting "fragile", if rates go up 1% then I think we will see house prices pause for a couple of years, perhaps even 5-7 years, there could even be price drops in some areas.

Sales would slow, we may even get time to do our DD before someone else buys the place

Having said all that, I don't think interest rates will go up, I think the AUD rising will stuff our exporters and the economy will slow. Unemployment will increase and people will start to be more conservative with their finances because of the uncertainty. I doubt that they will be in a hurry to borrow large sums of money.
Less investors of course, means that rents should rise in line with inflation for a few years, moving back to the traditional yields for each area.

I shall now get off my soap box

 

[Aceyducey]

So in conclusion,

If interest rates go up, property prices will increase to some extent (due to inflationary effects of interest rates)

If interest rates go down, property prices will increase (money is cheaper)

If interest rates stay the same, property prices will increase (inflation still a factor)

I believe that interest rates have a perimeter effect on property prices, they set the boundaries for potential price movements by setting the servicing cost and perceived risk:reward ratio.

Personally I watch population figures, access to services, fashion trends (renoing, auctioning, etc) & % of salary required to service home loans versus rent same property (affected by inflation rates).

Interest rates are only interesting to me in terms of gearing.

Cheers,

Aceyducey

 

[XBenX]

Interest rate increases and property values are only linked due to the stage in the property cycle.... lets look at our country "Somersoft"

Its been a great few years in Somersoft.... business is booming consumers are spending employment is low
Ppl are cashed up, times are good - lets splash out on that house - property prices rise...

.... then inflation comes along ... we are growing too fast... oh dear the govt is outside their target range for growth/inflation time for some MP to kick in.....

rates rise and economy slows etc etc back to the normal economic cycle....

looking at this .... hrmmm interest rates were rising at the same time as interest rates... hrmmm interesting

Originally posted by Macca
Warning: long post which is not advice, just my opinion.

In the past that has been correct, because interest rates have been raised to try to stop inflation. It was the inflation causing house values to rise, not the fact that interest rates went up.

Most of the present surge in real estate values is because of pressure from investors seeking higher returns than term deposits or the share market, plus the fact that because interest rates are low atm, a lot more properties became positive or neutrally geared.

If interest rates start going up, then repayments will go up and investors returns will be worse than they are now. The present surge is getting "fragile", if rates go up 1% then I think we will see house prices pause for a couple of years, perhaps even 5-7 years, there could even be price drops in some areas.

Sales would slow, we may even get time to do our DD before someone else buys the place

Having said all that, I don't think interest rates will go up, I think the AUD rising will stuff our exporters and the economy will slow. Unemployment will increase and people will start to be more conservative with their finances because of the uncertainty. I doubt that they will be in a hurry to borrow large sums of money.
Less investors of course, means that rents should rise in line with inflation for a few years, moving back to the traditional yields for each area.

I shall now get off my soap box

as our balance of trade is mainly made up of goods and services that dont rely on the AUD (as they are either hedged or non AUD contracts - most primary products operate like this - the only real exception is wool as Au has some market power)

so I cant see the export side of things having a huge effect...

i like the idea of yields heading back towards average !

 

[Rolf Latham]

Hi All

87 to 92.

REIA Sydney median price plotted againt rates will will show a peak of 18 % rate with a close to corresponding peak in median price.

With 2.5 years of that short peak median price was down 25 %, and didnt get back to 100 % of the orignal peak until 1997.

Interpretations:

1. High rates = high prices
2. Rates take a while to bite
3. Dont let rate exposure erode any gain you have made
4. Insure against having to sell in that peak interest shadow


Must also note though that those rates at 18 % were in an environment where inflation and wages growth were running in the double digits, AND yields (I think) were in the 8s.

Ta

rolf

 

[XBenX]

thats right - someone did a study on the correlation...

do any of our addicted linkers remember it ?