1/ There is a unproven myth floating around that during a period of rising rates, real estate investments are going to collapse.
I disagree with this view and here are a few points on why I think this way.
I disagree with this view and here are a few points on why I think this way.
2/ Firstly, there are some examples in history where rising rates hurt property & others where it didn't.
If you study London's dwelling price since the 1950s (this chart since 70s) you'll notice that rising rates in the 60s & 70s (the UK almost went bust) didn't hurt the price.
If you study London's dwelling price since the 1950s (this chart since 70s) you'll notice that rising rates in the 60s & 70s (the UK almost went bust) didn't hurt the price.
3/ Actually, the two major crashes for the London property market came in 1990-93 and 2007-09 — and both were during a secular decline in rates.
The one in 1990 was linked to a short term overtightening by the world's central banks which triggered a global industrial recession.
The one in 1990 was linked to a short term overtightening by the world's central banks which triggered a global industrial recession.
4/ Also worth noting is that natural interest rate forces tend to rise during inflationary economic periods. Inflation increases the replacement cost of a property meaningfully as construction goes through the roof. New supply of property falls and prices eventually rise.
5/ Furthermore, inflationary periods benefit landlords a whole lot more than stock market investors. Rents tend to explode!
Rising rents & fixed debt repayments are a formula to wealth building. No other asset class allows you to borrow at such a low rate & fix it for 30 years!
Rising rents & fixed debt repayments are a formula to wealth building. No other asset class allows you to borrow at such a low rate & fix it for 30 years!
6/ Of course, we know that mortgage debt is extremely high relative to the 1960s or even 2005. Keep in mind, vast majority of this debt is fixed for long periods in US & EU.
Moreover, you always have a choice to invest in markets where debt levels aren't at nosebleed levels.
Moreover, you always have a choice to invest in markets where debt levels aren't at nosebleed levels.
7/ Summary: mortgages are the cheapest of all the debt (aka good debt), ability to lock in debt over 30 years, rising rates correlate to inflation meaning higher rents (while repayments are fixed) & higher property replacement & construction costs (meaning future supply low).
8/ Of course, ultra-sharp interest rate rises will hurt any asset class, including real estate, stocks, private equity, and the overall economy. This is only normal, and the best position during this brief period is holding cash.
