Property Values vs Interest RatesMake Text Bigger
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 ………
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