Investment Real Estate Mortgage RatesReal estate investment Mortgage rates
This all raises the issue - are interest rates really worrying? Mortgages have become almost free in many jurisdictions. According to Statista.com, mortgage interest rates in Germany fell from 5.2% to 1.5% between 2007 and 2016. By 2017, Germany-based LTV mortgage holders will be able to buy, lease and earn returns of 3-4% per year on 80% LTV mortgages of apartments at 1% per year.
Real estate landlords can afford the mortgage with their rent revenues and benefit from an average of 2-5% growth per year, according to site. Borrowing costs are significantly lower than rents. They have to find alternatives and therefore choose real estate more and more because it is a dependable way to make investments with relatively high returns.
As a result, real estate assets holders do not want to buy their real estate at sensible prices: if they go "in cash", they have to reinvest the funds in something, and there are very few available alternatives. After depositing funds with a bank, they have to repay interest at a rate that is below the rate of the bank.
As a result, the number of stock options available on the stock exchange will be further reduced. Low interest rates have boosted real estate consumption, resulted in higher prices in robust economies and halted falls in prices in those economies that clearly felt the impact of the 2008 financial year. Housing prices in Austria and Germany rose by 20% between 2013 and 2016, while real estate in certain sectors (e.g. Berlin and Munich) increased even faster, according to Eurostat.
In the same time frame, Spanish and Portuguese sales reached bottom and began to increase and Australian, Hungarian, Irish, Canadian, Polish and US sales grew dynamically. Today's real estate in Europe can be characterized by the following metaphor: On the other hand, low interest rates have also increased supplies, as more money has been available for building.
In the last six years, thanks to cheaper mortgage loans, the world markets have obtained a large number of meters that would never have been built without such inexpensive funding. Does a tariff rise result in a decrease in prices? In the last two years, the credit markets have started to change: the Fed has raised the funding interest rates three fold since 2015 and will probably do so twice by the end of 2017: in June and in December.
Fed carefully increases funding rates. The aim is to find an efficient equilibrium between the risk of low interest rates and the wish not to hamper the economy. The mortgage interest rates are based on the funding interest rates. Rising US interest rates may be followed by higher interest rates in the UK and mainland Europe.
It is also not known how the bond markets will react when interest rates start to rise. When lending rates rise significantly, depositors loose their purchasing power. Contributions will begin to recover, even if only marginally. It is likely that the volume of building will reach its climax at this point and the range of real estate on the property front will increase: homeowners will want to confine their gains or refuse encumbering mortgage loans and real estate that has already depleted its cash flow.
This can all stop aggressively buying and even lead to a drop in house prices in remote areas. Thus, for example, a real estate in the USA brought its investors a return of 5% per year with a 1% return on treasuries. The spreads (or investors' compensations for risk) were 4% per year.
Subsequently, the general interest rates rose and the return on sales rose to 3%. Logically, the investor (the prospective buyer of the property) will demand the same degree of credit protection as before. That means that the return of such a real estate must rise to 7%. Either a corresponding rise in rent revenues or a decrease in the square metre rent can be used to achieve this.
Long lease agreements are not often checked, so that only the second alternative - lowering the rent - is sustainable. However, we estimate that when and as soon as regulatory authorities start increasing tariffs, they will not do so quickly, but progressively, and therefore no rapid adjustments can be foreseen.
However, it is the case that economic activity has already hit the limits in many advanced economies. A lot of depositors realize that falling asset values can cause falling asset prices. It is likely that such a threat occurs in places where the populations, incomes and number of jobs do not increase. Interest rates hikes are a perceived threat that must be considered in the run-up by professionals.
It is recommended that you take special steps to compensate your installations. Investing to avoid losing money: don't fund the project, set the interest on it. You have to do to make a profit: Investment in value-added products (development and redevelopment) - this is how you profit from the increase in the cost per m².
When investing their resources in rented properties, seasoned depositors select at least 10 year investment periods. Since every real estate exchange is cyclical, a pricing correction is inevitable for long-term assets. Nevertheless, in developed economies, median yields and real estate prices tend to outperform headline inflation, compensating for expected pricing changes.
For 2017, we are recommending to invest in real estate abroad according to the following criteria: When mortgage rates rise, these advice will help free your assets from the risk of mortgage corrections.