How Interest Rates Affect
the Property Markets

Posted on 17. Nov, 2009 by Chris Lang in Economic Issues, Industrial Sector, Interest Rates, Investment Opportunity, Offices, Property Cycles, Residential vs Commercial, Retail Sector, Your Exposure

If the Reserve Bank (RBA) further increases rates in December, you will start to see the housing market plateau in the New Year. However, this should have little or no immediate effect on the rest of the economy.

In all discussion about Australia's improving economy and retail spending, there has been little regard placed upon the enormous growth in household wealth over the past 6 to 9 months.

The Westpac/Melbourne Institute consumer confidence index showed around a 30% surge in the three months to the end of September. And as you can appreciate, both housing and stock market wealth significantly influence consumer confidence and, therefore, spending.

The RBA is expecting the economy to recover quicker than anticipated — revising its forecasts for the December quarter from 0.5% to 1.75%. And it is also predicting economic growth to reach 3.25% by the end of 2010.

In fact, the recent National Bank Australia survey showed that the already-high business confidence climbed even higher in October — supported by a healthy growth in profits and sales for the last quarter.

When you couple this with a huge in resources sector and high immigration, this should sustain Australia's economic growth for the next 3 to 5 years — virtually ensuring the RBA will continue to increase interest rates.

How do Rates affect the different Property Sectors?

Once the effect of rising interest rates starts to bite... the initial impact is felt within the housing market, as mortgage payments escalate.

This then flows through into consumer spending — which tends to curb the ability of retailers to pay increased rents. And in turn, the property prices in the Retail sector start to flatten out.

For Industrial property, the effect starts to be felt about six months later, as stock orders begin to decline from the warehouses.

However, an interesting study by BIS shrapnel (over an 80-year period) has confirmed that the health of the Office sector bears little correlation to movements in interest rates. Instead, it is primarily affected by an over or under supply of space.

So, there you have it. And you'll see this scenario unfold progressively, over the next six years.

Tags: business confidence, chris lang, consumer spending, household wealth, housing market, initial impact, mortgage payments, national bank australia, property sectors, rba, resources sector, Retail Sector, rising interest rates, shrapnel, stock market wealth, stock orders, westpac