Property values are some of the most critical aspects of the real estate market. They are what drive investment decisions and can make or break a deal, explains experienced realtor Jamell Tousant. They regulate how much money is available for buyers and sellers, development, and growth. In short, property values are the lifeblood of the real estate industry.
However, property values are not independent of other economic forces. They are, in fact, very much linked to the direction of interest rates. The relationship between interest rates and property values is not always direct, and we will explore how exactly it works in this article.
Demand for Capital
When interest rates are low, more people will likely borrow money to finance their next purchase. As such, lenders could run out of money. When the interbank exchange rate is also low, the costs also drop. Servicing the extra mortgages becomes a lot easier.
However, as the number of people borrowing to finance the high property costs increases, banks may need to bring in offshore money to keep lending. This still falls within the laws of supply and demand, but the international markets are doing so instead of dictating the amount of available domestic funds. According to Oakland realtor Jamell Tousant, the higher the demand for capital, the more expensive it gets. This directly impacts how interest rates will be set to control how much is being borrowed.
Individual Property Buyers
When rates are low, buyers tend to have more money available. This is because the repayments on their mortgage are lower than they would be if rates were higher. As a result, demand for properties usually increases when interest rates are low. This puts upward pressure on prices as people compete for a limited number of properties.
However, when interest rates are high, buyers have less money available, and demand for properties usually falls. This puts downward pressure on prices as people are not willing or able to pay as much for a property.
Property Developers and Investors
Property developers and investors rely on capital to finance their projects. Jamell Tousant indicates that when interest rates are low, the cost of borrowing is also low. This makes it easier and cheaper for developers to finance their projects. As a result, we tend to see more development taking place when interest rates are low.
This increased development activity affects the property market as more properties are available for sale or rent. This increased supply puts downward pressure on prices.
Conversely, when interest rates are high, borrowing costs are also high. This makes it more difficult and expensive for developers to finance their projects. As a result, we tend to see less development taking place when interest rates are high.
This decreased development activity has a flow-on effect on the property market as fewer properties are available for sale or rent. This reduced supply puts upward pressure on prices.
The Macroeconomy
The macroeconomic conditions of a country also play a role in dictating how interest rates are set. For example, if a country is experiencing high inflation, the central bank usually raises interest rates to cool the economy down. This is because higher interest rates make it more expensive to borrow money, which deters people from doing so.
According to Jamell Tousant, when inflation is high, property prices fall as demand for properties decreases. However, once interest rates have been increased and inflation starts to fall, we usually see property prices begin to rise as demand for properties increases.
In summary, interest rates remain essential in directly and indirectly regulating property values. If you plan on buying a property in the near future, Jamell Tousant recommends that you keep an eye on interest rates as they could significantly impact your purchasing power.
