Property Values vs Interest Rates

Property Values vs Interest Rates

23:21 PM, 8th May 2012, About 12 years ago 15

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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 ..........

 


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Comments

8:52 AM, 10th May 2012, About 12 years ago

the goverment wont let the housing market crash,thay have to much invested in it for that.as for the banks thats a different matter there greedy ???? if you have money in the bank to fund a 20% deposit for a buy to let and a job to boot they will lend so whot happends when you have  propertys and thats you only income say  22000 a year nobody wants a good risk . inless your up too you eye balls in debt and scrapping by. THE WORLDS GONE MADD

Neil Patterson

9:00 AM, 10th May 2012, About 12 years ago

Hi Tim, Great to hear fom you and some excellent points.
On the subject of inflation I disagree with the view that the BofE will have to curb imported price lead inflation. The spriralling cost of imported goods and the knock on effect of oil prices to the production and transport of domestic products only has the effect of reducing the Uk's populations ability to purchase none essential items.
It is for this reason that the BofE have not reacted to inflation figures being over 2% as domestic demand lead inflation is none existant. The BofE took 2 years to recognise this when it was obvious back in 2007.
If the increasing cost of goods caused wage inflation as a result of employees demanding and receiving pay rises then I would agree that demand lead inflation was occuring and this would need to be curbed by interest rate rises. However we all know that this is not currently happening unless you are the CEO of a FTSE 100 company (political coment)
The cost of living for all of us is increasing, but our bank balances are decreasing and we are all purchasing a lesser quantity of nonsubsistence goods and services. If interest rates are increased the position will become worse and the Uk's GDP will suffer as a result of decreased domestic demand. This will only be countered when it becomes more expensive to produce good in the countries like China and Brazil and they then net import from the UK which I beleive we are a long way off from happening.

20:24 PM, 10th May 2012, About 12 years ago

Hi

I'm nobody special in property and I must be
missing something.  I’ve read some good
comments but they all seem too rosy to me. My take is:

The B of E will no longer allow house prices
to race away (they have learned a valuable lesson - I think) – it’s what
enabled everyone to borrow way too much money and contributed to the huge
consumer debt mountain.

The dip in house sales in the last month or
so is due to rising mortgage rates (even though B of E Base rates are
unchanged) and not the end of the Stamp Duty Holiday (that may have been relevant
in London but not else where).

If house prices start to over heat, the B of
E will increase base rates to cool things down, bringing stability back to
house prices again.

I’m far from convinced that house prices are
going to go up much, if at all, in the next 5 years as people don’t have the
money to buy.  Neither do they have the
money to pay the monthly repayments let alone find a deposit.  This will also keep a cap on rental rates.

My feeling is interest rates will rise
slightly and house prices will fall slightly. 
What happens after five years – well the crystal ball broke at that
point !!

David

Mark Alexander - Founder of Property118

21:05 PM, 10th May 2012, About 12 years ago

Hi David

Something funny happened to the line spacing in your comment so I've tidied it up, no text changes.

It's quite a commonly held misconception that BoE is interested in controlling house prices. It certainly shouldn't be, unless that is, house prices suddenly begin to affect demand lead inflation. The BoE has just one single objective, to keep inflation at 2%.

As Mr Patterson has said, inflation in the UK has exceeded the BoE targets for some time. However, strip out external influences such as imported food and energy price rises and that shows a very different picture of demand lead inflation well below the target 2% and potentially heading towards deflation. Any increase in interest rates under such circumstances would push the economy deeper into recession.

If we look at property from a pure supply and demand perspective then it should go up. However, affordability of deposits, lack of appetite for lending and general insecurity amongst the working population are all holding back this growth.

I very much agree with Tim Fawcett's analogy of a dam waiting to burst. I believe that will happen when lending criteria eases. There is an argument for lending criteria to ease as soon as 2013 once the banks have repaid the bailout money and choose to compete again for increased lending. For the people who like to look at trends, years ending in a 3 generally perform better for property than any others. Neither of these arguments for property values to rise next year are any stronger than the arguments for it to crash though. Therefore, I stand by my strategy to prepare for the worst and plan for the best.

Mark Alexander - Founder of Property118

22:33 PM, 22nd May 2012, About 12 years ago

Interesting update. We ran a uSurv opinion poll on this today and 82% of respondents thought interest rates would rise first (50 respondents). Details here >>> 
http://www.usurv.com/CGSYFAACx

Note this was a very low budget survey which took uSurv just 7 minutes to get 50 responses to. We will definitely use them again. I watched the answers come in live over a Latte at Costa Coffee and the whole thing cost just £25, i.e 50 pence per respondent. As you can see from the linked page, uSurv even broke down demographics for that price!

Well done uSurv, I still think property values will rise first for the same reasons that 2patterson has given but I also accept that public consensus is the opposite.

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