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According to the IMF, house prices have started decreasing in many countries, which may seem like good news for all. However, the reality is far from that because a price decline does not necessarily mean buying a property is affordable. Various factors drive the real estate prices, especially the rate of mortgage.
The mortgage rate refers to borrowing money to buy a house or any other real estate property. It is determined by the policy interest rate set by the central bank or the financial institutions of various countries. As you may have guessed, inflation is the driving force behind the high rate of mortgages.
How Does Inflation Affect Interest Rates on Real Estate?
If inflation is more than where central banks want it to be, then the authorities may raise the policy rate. This makes it more expensive for banks to borrow money from it and increases the mortgage rates.
Banks deal with this by passing on their higher borrowing costs to homebuyers, especially when the interest rates are variable and can change depending on market conditions.
Generally, when mortgage rates go up, the demand for houses goes down, leading to lower house prices.
However, it takes time for prices to go down, depending on the availability and demand for housing. It keeps changing due to consumer preferences. In fact, when interest rates are high, and supplies are constrained, you wll be able to rent a home easier than buying a property. And it could keep pressure on rental costs until overall prices adjust.
Can Low Housing Demand Affect a Country’s Economy?
As real estate agents say, it is important that the rate of decline of houses is not more than the economy can absorb. The housing market is strongly connected to the other parts of the economy. Therefore, a sharp decline in housing prices could have a wider impact on the economy through different channels.
Firstly, the wealth of homeowners is reduced when housing prices are lower. This can lead to lesser consumer spending, which eventually leads to economic stagnation. Secondly, the construction industry is largely affected by a drop in house prices, worsening the economic slowdown.
Last but not least, lower house prices and an economic downturn can increase the probability of homebuyers unable to pay off their existing loans. As a result, it undermines the stability of banks, lenders and other financial institutions and diminishes their willingness to extend loans. This further impacts investment in real estate.
How To Avoid the Cons of High-Interest Rates in the Real Estate Market?
The impact of lower house prices will be larger if sellers overvalue them or if buyers are more indebted when the interest rates change. The government can mitigate the risk of a decline in house prices by making policymakers monitor the housing market.
Furthermore, they must take timely and targeted measures to limit the shortcomings of the real estate market. They could come up with tools and techniques to stop the demand for riskier loans when house prices are rising. Furthermore, they can create policy measures to ensure adequate capital for financial institutions.
Finally, authorities must put in efforts to boost affordable housing and improve property taxation rates and laws. These are important steps to mitigate house price pressure and protect against large price declines.
How Is Rising Interest Rates Affect Commercial Real Estate?
Rising interest rates directly threaten commercial real estate prices, specifically by increasing capital or the initial unleveraged yield. When valuing commercial real estate, institutional investors that raise capital from third-party equity sources are really reverse-engineering their offer prices by back-solving to a valuation that allows them to hit the return they promised.
*Low Purchasing Power of Investor
Raising interest rates affects real estate values because it increases the monthly payment that people have to pay on a monthly basis. So, let’s take a scenario to understand the problem better. Let’s imagine you are looking to purchase a million-dollar building and have to pay a hundred thousand as a down payment.
Furthermore, you are approaching banks to secure the loan to acquire the building. Now, if the earlier interest rates are between 4% – 5%, after the interest rate rise, you have to pay about 6% – 7% interest rates. So, you have to pay a conventional commercial loan, which is a twenty-year amortization period with a five-year fixed rate.
Regarding mortgage payment, apart from taxes and other costs, your mortgage payment is fifty-nine hundred and sixty dollars a month. Now compare that with the mortgage payment if you purchased the same building a month ago with a lower interest rate. And that is about nine hundred dollars of extra money you must pay monthly.
This way, your purchasing power as an investor goes down. Next time, if you want to invest in a commercial property, you have to pay a higher downpayment or look at a low price.
*For the Sellers:
So what does high interest mean for the sellers is that they will soon realise they cannot get the premium price they were expecting from their commercial property. There is a dip in the market for buyers, and the demand for their property is decreasing.
To stay in the business and avoid going into further losses, the seller will now price the property at a low price, affecting their pockets.
*For the Buyers:
In the buyer market, investors will slow down as their power of purchasing a commercial property is not the same. So, the demand as a whole for all kinds of real estate will go down, and it will eventually affect the country’s economy as a whole.
When Is an Ideal Time To Buy a Property?
According to Investopedia, the best time to invest in real estate is when the price and interest rate are low. Similarly, the ideal time to sell off real estate is also when the mortgage rates are lower so that you can find enough buyers for your property. To invest in a property in Dubai, Top Luxury Property is one of the best real estate companies that deal in real estate.
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