In yesterday’s article we discussed about why to invest in real estate builds your wealth faster. We discussed about Appreciation in market as a factor. If missed out then go through the following link.
Today we will discuss about the second factor:
INFLATION
As everybody knows government is putting money into more and more infrastructure development in country. Due to that there is an increasing supply of properties and property prices are going up—even without an overall favorable change in the underlying forces of supply and demand which is called market appreciation.
Interest Rates and Inflation
Media has again and again maintained the news in current scenario about low home loan interest rates which have caused the recent price up in real estate market.
If we check in reality, today’s Home loan interest rates of 6.5 – 7.5 percent are very low if we compare them with those home loan interest rates of 8 to 16 percent that we experienced earlier in 1970s and 1980s. But, still, you might ask, what happens to real estate prices if interest rates go up rather than going further down, will it affect real estate market ?
Higher Interest Rates Are always Caused by Higher Inflation
If you check data of home loan industry, Long-term interest rates climbed drastically during the 1970s and 1980s because the Inflation which is also called Consumer Price Index jumped from the somewhat mild annual levels of 2.5 to 4.0 percent of the early to mid 1960s all the way up to 13 percent in 1982. And as per the data available, you must note that during those 16 years of increasing Inflation and Home loan interest rates increased from 1970’s 8 percent to 1981’s 16 percent and most of the property values nearly doubled or tripled.
Although higher Inflation rates drives up interest rates, Inflation also drives up rental incomes and construction costs. This is even better for investors who have already invested in real estate and have property, when Inflation rates are high, the money invested in real estate puts down other financial assets like stocks and bonds against other hard assets like real estate, gold, collectibles etc. As a result, property prices are pushed even higher as stock and bond prices stand there only or will always decline.
As per the economic data available, History has proved that over lengthy periods, higher interest rates do not have any effect on property values. But actually higher interest rates of home loan in the market which merely reflects high Inflation, shoots property prices to new record heights.
Whatever it is ; Higher Interest Rates or Lower Interest Rates – You Gain Either Way
Say you buy property today by taking a home loan through a bank with a long-term home loan interest rate of 6.5 percent. In case, if home loan rate of interest goes down, you have an option and you can re-finance your home loan and take advantage of lower home loan interest rates and minimize your EMI’s.
Yet there is a possibility again, if Inflation rates increases suddenly and home loan interest rates increase up to 8, 10, 12 percent or higher, then also you will make money out of it as Inflation will increase the price of your property. When home loan rates go down in market then your prevailing home loan rates, you can re-finance your loan. When home loan rates go up due to Inflation, you always start getting higher rents as your property prices even shoot up, you can always pre pay your home loan EMI by increasing the amount of prepayment. Nevertheless of which direction interest rates moves, real estate investors which have bought property with home loan gets excellent return on investment.
Cycling through History
But should never ignore the hard fact of real estate cycles. Every real estate investor knows that rental income levels and property prices rarely move upward at an even, steady pace. Sometimes prices are shooting up like anything and after some time rental and property prices merely crawl. And every now and then, short-term problems like excessive job loss, temporary overbuilding pushes send property prices lower. But rather than looking at all these things, this helps good investors to make money from Real Estate.
Personally if anybody asks for recommendation, I advice to invest in when market is down because they make buying much easier at good prices. Investors always work and benefit from the available opportunities – no matter what type of market they face.
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Author: NIKITA DAGAR
