Property Values vs Interest Rates

by Mark Alexander

6 years ago

Property Values vs Interest Rates

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Property Values vs Interest Rates

A question that came up in conversation this evening whilst in the car on the way back from my fiancée’s offices was “which will rise first, interest rates or property values?” Have you ever asked yourself this question?

I know what you are probably thinking, “haven’t you got anything better to talk to your fiancée about”, right? Well I guess that’s what happens when you mix an accountant with a Masters Degree in international business finance and economics with a landlord, economist and former finance broker LOL !!! Seriously though, give it a go at the pub or over dinner, ask the question, it’s an interesting debate for anybody with any interest in property, whether they are landlords or not.

In my perfect world  interest rates would always be 5%, rental inflation would always be 5% and property values would always grow by 5% per annum. I would happily change all those 5’s for 10’s, 15’s or 20’s but I’m not a greedy person 😉

Why would I be happy with 20% inflation, interest rates etc.?

Well  – I, like most landlords, rely heavily on gearing to leverage the returns from my property investment portfolio. If everything grows apart from my debts I’m quids in!” What I hate is this stagflation, low interest rate environment – give me the action of a boom or or better still the mass panic and and irrational behaviours of human beings in a crash and I’m in my element. It’s easy to make money in a boom and even easier to make money from property when the masses are acting irrationally, buy only if you know what you’re doing of course.

The perfect world for most though is consistency. The reality, however, is that we don’t live in a perfect world do we? In my lifetime inflation as been as low as 1% and as high as 29%. Property values have risen in some years by 20% plus and in others they’ve gone the other way. Interest rates have been as low as 0.5% and as high as 15%.

If interest rates go up before property values

That scenario could well spell disaster for landlords who have over stretched themselves and don’t have a “war chest” sometimes known as a “liquidity fund” or a “fighting fund” but more commenly known as a decent wedge in the bank. Many landlords who purchased in the latter half of the previous decade are in negative equity. If their cashflow is strained and they don’t have money in the bank or surplus cashflow from other investments, employment or businesses they may well run into difficulties. Solution – work smarter, work harder, earn more money.

If property values go up before interest rates

This would be the obvious wish for any landlords with mortgages but for first time buyers and anybody whose investments are cash based this would represent their nightmare scenario.

For me the jury is out

I honestly have no idea which will give first – will interest rates go up before property values rise or will it be the other way around?Obviously my preference would be for property values to increase well before interest rates kick in but I can’t find anything in history to say this will happen or even that the reverse will happen. My strategy, therefore, is to plan for the worst and hope for the best. I could just stop working now, live off my rental income and hope that interest rates will stay low for the rest of my life. However, that’s a strategy based on hope and that’s never a good thing. If I can increase my earnings and my reserves whilst interest rates are low the same time I will be safer than most so that’s what I’m working to achieve.

So, I’m sitting on the fence and hedging my bets

What do you think? Will interest rates go up before property values or will property values rise before interest rates? I’m really interested to hear what your views, especially if you are a property investor so please feel free to comment below and share your strategies or concerns.

The End Is Nigh!

If you want to predict doom and gloom, spread negativity and share your hatred of all property investors then you will be pleased to hear that a forum exists for like minded people called House Price Crash. Personally, I’m really only interested in hearing from genuine Property Investors and people who share my interest in the real economy. I created Property118 to mix with like minded people. If you are a landlord, property investor or a person with an interest in the economy and without an anti-landlord agenda I look forward to reading your comments. If you fit the alternative description above then you know what to do ………

From the Makers of Strongbow

As the banker said to the people in the Strongbow advert ..........



Jonathan Clarke

6 years ago

Ah yes - It is a connundrum that I ponder as well on a regular basis. My pure guessimate is that interest rates will rise first before property prices really  get going and that will prevent them rising as a bit of doom and gloom will set in. This will be very painful for some but the cash rich guys who have stashed their cash will either take advantage of the still depressed prices or use it to fend of the increased rates until the property prices catch up and everything settles. The educated gamble for me is do i buy  more high yielders now on 5yr fixes to increase my cash flow to pay for the increased rate rises when they come and not worry about capital values as I dont foresee a substantial release of equity for some time to come. Cash flow is king as the saying goes.

6 years ago

Hi, this could go either way. However as the housing sector is the backbone of any economy, sensible decision for voting in favour of the interest rate rise should be, when the house prices start rising. This will be in line with the real economic growth, unlike growths in the FTSE 100, which does not give an indication of the real economic revival of the economy as indicated by the current situation. 

On the other hand, this government seems to be in favour of interest rate rises as they already have pushed many of their owned banks to increase their individual interest rates. If this is to happen with the BOE base rate, there is a good possibility that the house prices will eventually fall further taking us into even deeper recession.

The good news is the independence of the BOE from the government, which has resulted in such low interest rates for such a long period. If it were to be managed by the government they would never have been so low. We should all hope that the BOE will still stay independent in their decisions for our real economy (the housing market) to flourish once again.

Please leave your comments on what you think

6 years ago

This is an easy question to answer... If the interests stay low then homes have a chance of holding their value (maybe very very small gains over the next few years), but realistically interests rates will return to more "normal" rates and home prices will plummet again. It is pretty simple because once the rates return to let's say 7% home prices will have to fall because otherwise there will be no buyers able to afford the high monthly payments that go along with 7% interest rates.

Jonathan Clarke

6 years ago

Kkatnik. Whoa!  With respect it is far from an easy question to answer as no one  knows the answer -  one can only surmise and speculate. I feel the opposite to you in that it is a very difficult question to answer.  You say interests rates will return to more ``normal rates``. It depends what you mean by normal. The credit crunch has produced historic lows for the BBR of  0.5% for 3 years. No one foresaw that. If your timeline covers 3 years then 0.5% is normal. 
.How far do you go back in history to determine what is normal or average is. 10 / 20 / 50 years?  Are 15% rates ever likely to happen again in the next 10 years given the way the economic landscape has evolved and matured over the last 50 years? Is what happened in the 80`s relevant today or should one concentrate more on more recent history to determine ones investment strategy now and in the foreseeable future. Should we use today the same formulas that we have used in the past to determine growth patterns now and in the future. Are they  relevant today or is this recession different to other ones? .I simply don`t know and nor does anyone. In 2050 we can look back and see perhaps the true nature of this period and its effect on our economic history.  I therefore see sitting on the fence and hedging ones bets as a very positive strategy to adopt and not a weak standpoint. Sitting on the fence taking a breather is good when they are no reliable tried and trusted signposts to point you in the right direction. I dont want to blindly  follow the yellow brick road when the red, orange or blue road may in hindsight be the right one to follow.  

Neil Patterson

6 years ago

Very simply, because economics is a Social science, which actually means no one knows. House prices are normally the first indicator of confidence therefore they will be the first to rise before the B of E reacts. Also the B of E attempts to keep inflation at 2% over a 2 year period so there will always be some lag to a recovery.

6 years ago

There are many valid points below but I do tend to agree with 2Patterson. The key question for me is how close the lag will be. I feel it would be suicide to raise interest rates prior to a house price recovery. In the meantime, cash is king, so do your best to build up that cushion ready to react when it is clearer what is happening.

6 years ago

Firstly I don’t think the Bank of England base rate is important anymore, as it no longer has much effect on interest rate of new mortgages.  So the base rate could go up at the same time as “real new mortgage rates” go down,  I believe this is very likely to happen as the banking system gets back on it’s feet.

I think the rate for 95% LTV first time buyer, (maybe 5 year fixed) is most important to predict house price movements and this rate will not reduce until the banks have more capital than they are able to loan to better risk profile customers.

Margins over base rate on mortgages have gone from something like 0.5% to 4% over the last few years, a change in the margins bank demand is as important as any change in the base rate unless you are one of the lack few to have a lifetime base rate tracker with a low margin.

Mark Alexander

6 years ago

Hi Jonathan, you're not alone in your thought process of buying HMO's to improve the yield across your portfolio as a hedge against interest rates. I've had that conversation many times over the last couple of years but I think I've got to a stage where I am happy with my lot. The thought of paying 4% over base and 2% fees also grinds on me, not to mention that the only mortgages available to me, due to exposure limits of lenders offering base rate trackers. I suppose after 23 years in the business it was inevitable that I would stop buying one day. All that said, I do still think geared property investment has a better long term potential than any other form of investment. If I had money and didn't already own a substantial property portfolio that would still be my first choice investment. HMO's for long term hold and low value, very tired houses or bungalows for refurbishment and flip would be my chosen model.

6 years ago

Hi Mark,
As you know I'm a property investor with a portfolio of 10 and a former commercial finance broker with a degree in economics and 20 years experience in the BBC as a producer of Business Programmes. Now I am a wealth manager helping people secure their future finances. OK enough of that. Congratulations by the way on your engagement.
Inflation is almost certainly around the corner - unless that is the U.K. suffers the same fate as Japan which has been floundering around with deflation for 15 years and near zero interest rates. But the Japanese are not poor. 
Should we be worried about inflation?  Well yes as the U.K. is an importer of inflation - it imports oil and products which can go up or down in price. The main problem could be that as China and other emerging markets continue to grow and mature those countries' low cost labour boat may become an expensive ship. Chinese goods are sold globally and these prices will rise without doubt.
The Bank of England will need to raise rates when the recognised measure of inflation consistently exceeds the desired limits. Lately there has been so much concern to grow the economy that even with inflation above the required limits interest rates have remained low at 0.5% to boost the economy.
That's all well understood - what's harder to foresee is the answer to your question and your historical perspective is probably the best measure. But remember that as they say 'past performance doesn't always guarantee future performance.
Your instinct is like mine - we base our feelings about the economy largely on our own experiences and reading of others. But what if we're now in a place where we have never been before? - huge public debt; low inflation, low interest rates, slow growth and high unemployment. The boom followed by the 1929 Wall Street crash; WW2 and its aftermath; The 'loads a money' late 80s then the '87 Stock Market crash; the '89 U.K. property boom and bust, the 2000 Tech boom and bust were all different.
One thing for sure, things will get better for everyone as they always have in the past.
My prediction is that during difficult times it's a bit like a dam. Growth, sentiment, investment etc all get held up and it acts like a giant wall holding things back. Remember it took 10 years for properties in the U.K. to get back to the values of 1989 with the lowest point around 1994. But prices rose really fast in the 5 years until 1997.
BUT momentum is still building albeit not materialistically. People want that bigger house with an extra bed room and bigger garden but they can't afford it right now. The longer they have to wait the more they will want it. Eventually the dam bursts and there is a demand rush.
There will be, I predict therefore,  a huge increase in property values some time in the future. It may be 10-15 years away but it will happen.
The next boom and bust will happen according to new and unforeseen factors.
Interest rates though might rise much sooner than that as they are easily manipulated by a small committee and the factors can be external as previously mentioned.
Emerging markets are growing fantastically well and many U.K. professionals are moving to work in them while the U.K suffers.
These markets are going to be the main drivers of global prices.
The price of oil is largely out of the control of the U.K as the middle east cartel decides levels of supply.
Commodities and the building blocks of our economy and construction industry also imported too.
Labour costs will rise as China, India, Russia and Brazil mature. Indonesia, Vietnam, Turkey and Mexico aren't far behind. Brazil overtook the U.K in economic size this year.
In the end the 'counter-cyclical' analysis which property investors hold close to their hearts should protect us all.
But you are right - CASH IS KING.    

6 years ago

I think that it will be nigh impossible for interest rates to rise much and here is why - before the crunch banks were making around 1 percent on mortgage lending.  Now they are making around 4 percent.  There is absolutely no gain for the banks in a raise interest rates, they will just carry on relying on the government to take on more national debt.

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