What happens if interest rates rise? Almost all people know that mortgages are going to be affected, it is something that they do not stop repeating in the information channels. Although it is true that mortgages are going to be more expensive, the implications for the entire economy are also. It has its positive side, and also negative.
In the following article, the most sought-after concerns related to interest rates and how they are affecting the real estate market will be contrasted. We will also see how bonds gain strength again and position themselves as an alternative for profitability, taking away some of the shine from housing.
Real estate sector with rising interest rates
Since mid-2020, a general trend in house price increases has been observed in all countries. This was due to the "mass" exodus (at least those who could) of people leaving the city in search of quieter or more spacious homes. Whether they were houses with terraces, more spacious, rural areas, etc.
This boom was something that we experienced in Spain, but the truth is that many countries saw their housing prices increase to a greater extent. Currently, where mortgages are becoming more expensive, what projection is there?
Housing in Spain
In Spain, housing has not stopped rising during the last two years. The recovery of real estate is explained by the reasons mentioned above and by the fact that the sector is not as stressed as in other countries. Another of the incentives, as has also happened in other places, has been cheap financing thanks to historically low interest rates. Although this ease of purchase was associated with a higher price of housing, it has not mattered so much to many families in view of the fact that rents have suffered an even more pronounced rise. This has led to mortgages being considerably cheaper than rent payments.
Those investors have also found incentives who, far from the derisory interest that the bonds have been able to pay and far from being able to make the savings profitable in a more or less expected way, have seen in the brick a way of being able to make them profitable. In addition, housing is also considered a refuge asset, everyone needs a roof. However, after the continuous increases in the Euribor in recent months, housing seems to be beginning to show signs that it is beginning to slow down the pace it had maintained.
Housing in other countries
After the crisis that broke out in 2008, Spain came out especially badly. However, the same did not happen in other countries. In many of them, oblivious to the virulent force with which the housing bubble can burst, they have seen housing prices rise to very high levels. It is precisely in these same areas that, after the rise in interest rates, the real estate market is already suffering and good times are not foreseen.
Examples of them are some whose price declines are in double digits:
- New Zealand. Its Central Bank has raised rates 7 times in the last 10 months. Housing has fallen by 11% and falls of up to 20% are expected.
- Poland. Several mortgagees have seen their monthly installments double as rates have increased. The government has intervened at the beginning of the year so that Poles could suspend payments for up to 8 months. This measure has affected the profits of the country's main banks.
Additionally, we find more countries whose prices have begun to fall, such as Australia, Germany, Great Britain, Canada... or even China, where there is concern even worldwide about the magnitude of the crisis and how it could branch out to the entire planet. Something similar to the USA, whose effects have also been seen, sales of new homes have plummeted, and the effects on its economy are often felt throughout the world.
Investment opportunities with rising interest rates?
The prospects for the real estate sector are currently quite negative, something that 1 year ago was the opposite. The paradox in these cases is that those who bought 1 year ago have now found themselves in a much more hostile environment. Investing carries risks, but many investors anticipating events began to undo their positions around companies in the real estate sector. Virtually all have been affected.
The largest of all of them, considered the largest "landlord" in Europe is Vonovia, whose shares have fallen by almost 1% for 50 year. At current market prices, your portfolio is valued at much more than its market capitalization, including your debt. However, if this price drop continues, its net value would be more compromised as the market already discounts.
It is highly possible that, as happened with the previous real estate crisis, when investors anticipate that the sector will recover, the shares of real estate companies or REITs will rise before housing itself. The only question we would be left with is whether stocks already reflect bottoming, being close to it, or whether the decline is going to continue. Likewise, those lucky enough to be able to buy REIT stocks near their lows, as has tended to happen, will be the ones to later enjoy better capital gains.
Bonds vs Housing
And finally, another disappointment in the real estate market has its luck in the fixed income market. As interest rates have been rising, bonds are now offering better yields. Valuing that it is more profitable, and also comfortable, as bonds rise and get closer to real estate yields, they seem to begin to recover the shine that many investors already considered lost.
The Spanish 10-year bond is close to 3%, the US 3% or the German 5%. Strong rate hikes usually precede a recession, but this time it had to be done in the spirit of curbing inflation. Although it comes from the increase in raw materials, such low rates with inflation at 1% is still a monetary policy that stimulates credit and consumption. Something to avoid, as long as prices climb more than they are already climbing.
