What will happen to property prices / rents if interest rates increase?

[JimC]

If interest rates start rising as is being touted in the press, say a few % through 04/05, what would be the probable effect on IP?

1. Would rents increase or decrease?
2. Would property prices increase or decrease?
3. Or would there be no real impact on either rents or prices due to interest rates alone?

 

[L Bernham]

There is no reason that rents should be affected by interest rates.

If interest rates rose to 15% would an investor be able to just charge more rent? nope.

It comes down to supply and demand.

 

[Bill.L]

Hi all,

LB, you have got to be kidding
"There is no reason that rents could be affected by interest
rates.

If interest rates rose to 15% would an investor be able to just
charge more rent? nope.

It comes down to supply and demand."

A bit of market reality won't go astray here!! As interest rates rise, LESS people can afford to purchase, but they have to live somewhere. Therefore there is an increase in demand for rental properties. First all the "slack" is taken up, then landlords start asking(and receive) higher rents.

Also we should be talking 1-1.5% interest rate rises in the next year or so at most, unless inflation kicks up into double digits.

bye

 

[L Bernham]

I was talking hypothetically. Who would expect interest rates to go up to 15%??

I'm talking about short to medium term rental prices.

As there is enough of an oversupply at present to meet the demands of renters and plenty of stock currently in construction there will be no shortage of properties to rent.

Also you said people have to live somewhere.
Well, people still have to work and as long as we have carpenters, brickies, plasterers etc there will always be enough housing so that a shortage of rental properties wont be a problem.

If you want to look further ahead at the longer term ramifications of interest rates rising then anything can happen.
A recession brought about by rising interest rates (ie falling property prices) could result in rents FALLING due to people moving back home, moving to smaller houses, sharing with more people (speak to Aussies living in London) or living in cardboard boxes in the most extreme case.

Dont forget, they are warning that when the bubble bursts it could cause a recession.


Cheers
LB

 

[Bill.L]

LB,

There you go again, taking things to the extreme again instead of the likely.

Lets look at a couple of facts that your doom and gloom scenario always overlooks;

1/ The population of the country is growing and grew by 255,000 last year(ABS). They will need somewhere to live.
2/ The ABS states that by june 2004 there will be an overall shortage of 8000 dwellings.(these figures are now a couple of months out of date)

Of course there will be an oversupply of some types of dwellings in some areas( my prediction is inner city apartments).

The tradies you mention will be building LESS as interest rates rise, because the demand for new property falls(assuming the boom slows as is the normal course of events).

You are obsessed with the "bubble bursting", yet when I asked you in another thread as to how you see this would effect things like interest rates, inflation , share prices etc, you were silent.

By the way, Aussies living in London think the rents here are cheap!

bye

 

[D.T.]

Hi L Bernham.

lol

-Cheers

Dave

 

[Aceyducey]

Originally posted by L Bernham
I was talking hypothetically. Who would expect interest rates to go up to 15%??

L Bernham, I've never known you not to be speaking hypothetically

Let's go back over your posts...

You predict a 50% across-the-board decline in property prices over the next several years (that you later adjusted it to a more optimistic 35-40% decline).

This will either cause or be followed by a recession.

At the same time you anticipate interest rates rising significantly (but not as high as 15%) and a rental rate freeze in the short-mid term due to an oversupply of property.

Following this rents will actually go down as despite the much lower property prices people will start moving back in with their folks due to the worsening recession.


Taking your hypothetical predictions just a little further out:

As the recession worsens, becoming another Great Depression and despite falling rental costs and plummetting property prices, people will all decide to live in those cardboard boxes you mentioned to avoid skyrocketing interest payments.

Cardboard box manufacturers will become incredibly wealthy & seminars on how to locate cardboard boxes with good rental returns & CG will flourish.

Finally, Doomsayers will start rumours about the imminent Bust of what would have become known as the Cardboard Bubble....

Cheers,

Aceyducey

PS: L Bernham, Interest rates have gone up beyond 15% before and may do so again. I'm surprised that despite doom and gloom in all other areas of your predictions you are not anticipating the interest rate cycle to repeat as well.

I know there is clear evidence that it probably won't repeat - but there is equally strong evidence to disprove the rest of your predictions as well and that has never stopped you before!

 

[brains]

L Bernham,

Good attempt to save your previous lame post but sorry mate...no cigar.....it was plain silly and again, Bill is right.
And so is Acey........(he says grudgingly )

Originally posted by L Bernham
I was talking hypothetically. Who would expect interest rates to go up to 15%??

I'm talking about short to medium term rental prices.

As there is enough of an oversupply at present to meet the demands of renters and plenty of stock currently in construction there will be no shortage of properties to rent.

Also you said people have to live somewhere.
Well, people still have to work and as long as we have carpenters, brickies, plasterers etc there will always be enough housing so that a shortage of rental properties wont be a problem.

If you want to look further ahead at the longer term ramifications of interest rates rising then anything can happen.
A recession brought about by rising interest rates (ie falling property prices) could result in rents FALLING due to people moving back home, moving to smaller houses, sharing with more people (speak to Aussies living in London) or living in cardboard boxes in the most extreme case.

Dont forget, they are warning that when the bubble bursts it could cause a recession.


Cheers
LB

 

[handyandy]

Hey Aceyducey

You have way to much time on your hands

I thought you guys were in the middle of a reno?? With lost of walls to move etc.

Cheers

 

[Aceyducey]

Handy,

All the walls are in, it's tiling, painting & other odd finishing bits now - and most of those tasks I don't like doing at night cause of the light...even with halogen lamps - you always notice bits not done right by light of day.

But I do hop on to the forum between jobs during the day as well - call it my smoko

Cheers,

Aceyducey

 

[Kristine..]

Hmmm

Well, despite all the talk about 'bubbles' and 'booms' I am yet to see any evidence of this.

The propoganda machine of the government, with the media willing accomplice, are doing their best to gently check the rise in property prices. Please note, I use the word 'price', not 'value'.

'Price' is what you pay for something today.

'Value' is the consolidated worth of something after the gilt has worn off the edges.

The price of oil and the exchange rate has significantly more influence on domestic interest rates than whether people buy houses or motor cars or holidays with the money once they've borrowed it.

However, to get back to the 'bubble'.

Perhaps I just live in the wrong area. I haven't seen any evidence of a 'bubble' anywhere around here. Each spring selling season sees the properties put to the market at more than the selling range of the year before. Prices then ease off (the rate of increases eases, 'values' do not fall) a tad until the next selling season. This means that people become accustomed to prices in a certain area and realise 'oh! to get the house we want, in that area, we'll have to be prepared to go to $X', and when they apply for finance, the market in that area has produced enough sales to substantiate the increased price and therefore, borrowings.

Of course, any new area is going to have to settle in for a few years, and this applies to new growth corridors such as the CBD, Docklands etc

These areas get the most scare publicity, but in 10 years all will be forgiven. The growth areas will have become established, vacancies / properties for sale will be no more than in other established areas, and life goes on.

Maybe the sky will fall. Maybe 'values' will plummet. As a spectator sport it is very thrilling. However, as far as I am concerned it is of peripheral interest only, as I have decided that I am never selling anything again.

So, L Bernham and others who would love to get into property investing but think that 'with your luck' as soon as you do, the market will crash and we will all be out on the streets, camping outside those millions of empty houses which no-one will be able to afford to buy or live in - please believe that your actions will not adversely affect the rest of us who view property ownership and property investing as simple and as natural as breathing.

Please be encouraged. Enough of the analysis paralysis. A little action (buy something!) will put a glint in your eye and a spring in your step, and over the long term, dollars in your wallet.

Cheers

Kristine

 

[L Bernham]

Here we go again. Always this attack on poor old LB.
I would never say anyones post was "silly" and I've seen a few that could be categorised as that.

I like your humour though Acey. Will have to invest in carboard box manufacturing companies.

Its funny how I'm still constantly misquoted.
Its like I'm the spokesperson for the generic community of doomsayers and all the crazy things people have heard doomsayers come out with are taken as having come from me.

Please tell me where I predicted interest rates would actually rise??? Somebody asks what will happen to rent if interest rates go up. I answer them and next thing I'm being accused of predicting an interest rate rise. Whats doing there?

The "people need somewhere to live" arguement has run its course and run it well.
Whats the word for that again? When you use a valid point to draw an incorrect conclusion. ie "people need somewhere to live and therefore property will always go up" .
Its investors fueling this boom, not owner occupiers. One thing I will predict is there will never be insufficient houses in Australia for people to have somewhere to live. If in doubt of this please go and visit some other country and see how they cope with 10 times the population density then our Australian cities.

the observation I have made about rents falling has come from other posters on this forum and real estate agents themselves. I looked in a RE window the other day and half the rental ads had their prices crossed out and a lower one written below.
Go for a drive in almost any street in Brisbane and you will see more "For lease, Rent me, Available for rent" signs out than ever before. I phoned and agent to ask a price and was told the price and that its VERY negotiable. I've never seen anything like this.
I'm no genius (even thats debatable) but to me, it looks like rental returns are going down. what other conclusion can I draw.

LB

PS Falling in love with any investment will always end in tears.

 

[suggo]

Originally posted by L Bernham
Here we go again. Always this attack on poor old LB.
I would never say anyones post was "silly" and I've seen a few that could be categorised as that.

True you wouldn't say someones post is silly you say things like this instead:

"Your post demonstrates neither logic nor relates in any way with the point I was making. Its why I don't often bother with people who don't have a basic understanding of ordinary financial concepts. I thought posting on an PM Economics thread I would avoid this type of response. "

Much nicer eh!!??

As for "I'm no genius (even thats debatable)"...........um no debate here!

Now for something I think is the problem with your posts, they are all about the now, short term stuff, and most people in here are thinking long term. Well thats the way I see it and I'm no genius (and it isn't debatable!)

 

[L Bernham]

sorry if I offended anyone, I forget humour doesnt always come across the way its intended in posts.

Where would the assumption that I have short term views come from???
I wish people would stop doing that.

Relax. Enjoy life. Dont take anything too seriously. We all end up in the same place in the end.

cheers LB

 

[Bill.L]

Hi all,

LB you need to say you made a mistake. The question asked was a "what if interest rates rise??"

Your answer was that there are too many properties and nothing will happen to rents.

I think that is incorrect, and have stated why. As for you being "misquoted" err excuse me but I quoted EVERYTHING you said in one post, as an example of where you were wrong.

AGAIN,AGAIN,AGAIN I ask you for what you think will happen over the next 3 to 5 years(apart from property will fall 50%). Rents, Interest rates, Inflation, $A, unemployment levels, GDP growth, etc.

bye

 

[Jakk]

G'Day all,

With all this doom and gloom type stuff that is starting to circulate in the media and also starting to permeate into this forum, I feel it is an opportune time to share another of my wall hanging "words of wisdom" type posters with you all.



The Man Who Sold Hot Dogs

There was a man who lived by the side of the road and sold hot dogs. He was hard of hearing so he had no radio. He had trouble with his eyes so he read no newspapers and of course he didn't look at television.

But he sold good hot dogs. He put up signs on the highway telling how good they were. He stood on the side of the road and cried, "Buy a hot dog, Mister?" And people bought. He increased his meat and bun orders. He bought a bigger stove to take care of his trade. He finally got his son home from college to help him out.

But then something happened. His son said "Father, haven't you been listening to the radio or reading the newspaper or watching television? There's a big depression. The European situation is terrible. The situation in East Asia is out of control. At home we have problems with inflation, riots, pollution, strikes, minorities, majorities, the rich, the poor, drugs, Fascists and Communists."

Whereupon the father thought, "Well, my son's been to college, he reads the papers and he listens to the radio and watches the television, and he ought to know."

So the father cut down on his meat and bun orders, took down his advertising signs and no longer bothered to stand out on the highway to sell his hot dogs.

And his hot dog sales fell almost overnight. "You're right, son," the father said to the boy. "We certainly are in the middle of a great depression."


I don't know who wrote this one...........Let me see, I think there's another one here titled "The Man who sold Cardboard Boxes"

regards

 

[L Bernham]

Bill
Why do I need to say I made a mistake. Because I have a different opinion then you? Does that make mine automatically wrong.

The number of properties will not reduce if interest rates rise AND they will still keep building them to house the increase in population. Its going to be a while before there is a shortage in rental properties. There are still heaps on the market.

Lets not forget that if there are forced sales that will mean more renters (as someone correclty pointed out) but that will also mean one more property available for rent.

I' m not going to give an answer as to where I think interest rates will go, $A, unemployment. I hear people predicting this kind of crap all the time and I realise no-one has any idea.
What I will say is that a 30-40% decline in the PM will cause a recession, and that is undeniable.

Another undisputed fact is that Australia has the highest property prices in the world relative to income and no country ever stays on top of that list for too long and even then dont just slip back into 2nd or 3rd either.

Cheers
LB

 

[L Bernham]

I also read a good story from someone who worked in the WTC the day it got hit.

"Bob was working away at his desk when he thought hesaw a plane coming straight to the building. At first he didnt believe it and figured he should probably get his eyes checked.

As the object out of the window got bigger he realised that he couldnt dismiss the evidence in front of him anymore so he started telling his workmates.
They pretty much laughed at him and said he must be losing it.
He said "no honest take a look around you rather than staring blindly in the same direction". But they didnt know any better and staring at their computer was what they were used to and comfortable with. They were busy and really didnt need this.

As the plane came closer Bob started getting frantic at which point people started getting annoyed. They called Bob things like naysayer and pessimist. One man (Sanchez) made the comment that Bob had been predicting this for a little while now and since it hadnt happened yet he was obviously wrong. His boss Jemima said that what he was predicting was a virtual impossibility as the WTC had never been knocked over before. Others just shook their head thinking "I just cant imagine it happening, so it clearly wont".

In the end Bob said fine I'm leaving this building. Jemima said he'd be lucky to have his job when he came back. Bob said "Whatever dudes, I've got longer term horizons than that".

Bob got out a little while before he had to. He could have enjoyed his job and that great view for a little longer but he had no regrets that he got out when he did.
Jemima, Sanchez and ors werent so lucky. Their families wished they had just stepped out of their comfort zone and listened to Bob. "

Cheers
LB

 

[jahn]

L B
LOL
jahn

 

[JimC]

Originally posted by Kristine..
Hmmm

Well, despite all the talk about 'bubbles' and 'booms' I am yet to see any evidence of this.

The propoganda machine of the government, with the media willing accomplice, are doing their best to gently check the rise in property prices................

I agree with you Kristine. In my limited experience with the stock market it usually pays to do the opposite of what the government / media propaganda machine suggests. In Sydney anyway, I dont see any evidence that this is a bubble or that its about to burst? Thats just my opinion as a casual observer / non-expert / member of the public, and is not based on any scientific fact!