INTEREST RATES AND THE CYCLE
Interest rates in Australia and around the world have been trending lower and have remained low for quite some time now.
The movement of interest rates affects the real estate cycle. plus make a comment on prices and the cycle.
The first thing to note is that rates affect the cycle over the course of decades, not years. This is little understood by many investors, who only consider today's interest rate when making an investment decision.
Over the past decade all property owners have been refinancing their loans to lower rates whenever possible as they dropped. As they do, property prices rise as the cost of holding drops and return on investment (ROI) increases. Plus when it is as cheap to buy as rent, more renters turn into buyers.
Over the course of the cycle, the process keeps building. It’s why the real estate cycle goes for decades, not years.
As per all past cycles, we will eventually get to a stage where real estate prices have risen so high they’ll eventually become susceptible to rises in interest rates.
It’s a long-term process. But prices have to really hit the highs for tiny interest rates movement to make a difference.
"HOUSE PRICES TOO HIGH"
November 2017; Chancellor of the Exchequer Phillip Hammond, United Kingdom; "young people are being priced out of the housing market."
Commenting on the UK housing The Financial Times put it this way:
‘The cost and availability of housing has become a potent political issue [sic] in the UK, where younger people especially are being priced out of the market while their parents and grandparents benefit from decades of above-inflation rises in home values.
‘The ruling Conservatives, traditionally the party of home ownership, now finds itself shunned by millennial voters frustrated by spiralling housing cost.
‘So far, the response has been to provide subsidy to renters and buyers, and to exhort the construction industry to build more.’
In the UK, the Chancellor believes British house prices are high because the country has not built enough houses.
The solution, then, appears obvious — build more homes
(So it’s more of the same, in other words.)
In 1951 the UK government said the same thing.
A construction boom followed after credit and mortgage laws were liberalised to get even more houses built.
Credit rules were relaxed even further in the 1980s. This was when Margaret Thatcher attempted to get all British people into their own homes — again after the alleged shortage of houses in Britain was brought to her attention.
The problem is NOT a shortage of housing. It’s a misnomer.
Figures from the UK Office for National Statistics tell us there were 27.2 million households in the UK in 2016. There were 28 million dwellings available in the UK in 2014, the last year for which UK-wide figures are available.
Even allowing for second homes and those homes that are temporarily empty, there are more dwellings in the UK than there are households.
Australia is similar.
The result back then was the same as it will be going forward: An strong property boom, followed by an strong downturn.
2026 is the year to be prepared for.
Once again, so far for the current cycle, there seems nothing that’s likely to stop this process from repeating again into yet another peak around 2026.
Even more significantly, the creation of spending power — out of thin air, just like what the banks do — is being intensified by cryptocurrencies.
And just where do you think all this extra ‘created’ spending power is likely to eventually end up?
Yep. Real estate.
Now can you see how real estate prices could go even higher still?
For this cycle, the process has many years to run.