What will happen to the property market when base rates rise?
There are many property markets around the world which are enjoying a very strong run with prices pushing further and further ahead. In many ways the situation has been fuelled by relatively cheap finance made available to banks around the world as well as an array of financial incentives from governments. At this moment in time the general recovery in worldwide property markets, although it is to very different degrees, seems to be gathering momentum although some areas such as Europe are still struggling.
However, what will happen to the worldwide property market once worldwide base rates begin to move higher? Are some investors not factoring in the likelihood that base rates will increase at some stage?
Short termism
If you take a look at an array of strong property markets around the world such as the UK, US, Australia, etc you will see that the performance of the underlying economies are beginning to improve. Indeed the likes of Australia have never even moved into recession since the 2008 US mortgage crisis despite the fact that the worldwide economy went into meltdown. So, are property investors taking a short-term view on current market strength and perhaps failing to factor in the longer-term situation?
Quote from PropertyForum.com : “Over the last couple of years we have seen a significant recovery in the UK property market which has left many homeowners in a far better financial position than just after the 2008 mortgage crisis. As a consequence we are now seeing many homeowners looking to downsize their properties with potential capital returns of between….”
When you look at the likes of the London property market, where yields have fallen below 3% in some instances, you would be forgiven for assuming the world had gone mad. However, when you factor in relatively low inflation, property asset value increases and as well as base rates just hovering over 0% perhaps we are not comparing like-for-like when looking at today and years gone by?
Medium to long-term situation
There is no doubt that we are not comparing like-for-like with base rates hovering just over 0% around the world but what happens when base rates do move back onto an upward path? This will immediately filter into money markets, mortgage arrangements and could bring a stop to the short-term improvement in property prices. Depending upon which experts you talk to, we could be looking at relatively low base rates for the next decade or we could see some upward movement over the next couple of years in countries such as the UK.
Whatever the reality there is no doubt that the chance of base rates increasing in the short to medium term has risen markedly especially when you bear in mind property markets. If the likes of Europe were to pull away from the economic troubles of recent times and the US government was able to finally put to bed lingering budget issues, where would we be?
It is all a matter of risk/reward
However you look at worldwide property markets the reality is that they are priced on a risk/reward ratio and the higher the risk and the lower the rewards the fewer investors will participate. We have been moving towards the higher end of the risk ratio and the low-end of the reward ratio in markets such as London and other areas of the world but cheap finance is certainly fuelling the fire of demand.
It will be interesting to see when the so-called experts call the top of the UK market, some US markets, Australia and indeed when they decided it’s time to switch to Europe which has been bombed out for some time. The likelihood is a trickle of profit takers looking for new markets could very quickly turn into a river and lead to a possible medium-term price correction which could leave those investors entering the market towards the end of the current bull run with significant losses.