Real Estate Investing
- Real Estate Investing
- MODULE 3: Real Estate Fundamentals and Rules
- How Interest Rates Affect Real Estate Prices?
MODULE 3: Real Estate Fundamentals and Rules, Lesson 5
How Interest Rates Affect Real Estate Prices?
Adnan Ul Haq
Module 3:Real Estate Fundamentals and Rules
How Interest Rates Affect Real Estate Prices?
Adnan Ul Haq
Have you ever thought that how and why the change in interest rates leads to fluctuation in property prices? If you want to make a career in real estate investment then it is very important for you to understand this process.
What Happens When the Interest Rates are High?
A high-interest rate changes the prices of the property. When the interest rate changes then a few things happen.
The first thing is that when people go to the bank for taking loans or mortgages then the bank will ask them to pay an installment of PKR 15,000 if earlier they had to pay an installment of PKR 10,000.
Similarly, if earlier they had to pay an installment of PKR 1 Lac now after the increase in the interest rate they will have to pay PKR 1.5 lac. When the interest rate increases the installment price also increases.
So, a person who earns PKR 2 lac a month, can pay PKR 1 lac as an installment but not PKR 1.5 lac.
The change in the rate of installments causes a domino effect. How? Read below:
Fewer People Qualify for Mortgage
When the interest rate increases people are not able to qualify for the mortgage.
Firstly, the bank won’t qualify them because of less salary as compared to the installment price. Secondly, the person himself will not be willing to sign up for the installments because it will not remain feasible for him.
So, people are not able to buy houses or other properties when the interest rate increases.
Decrease in Demand
When people are not able to buy properties the demand for houses or apartments, or other properties decreases.
Increase in Supply
When the demand decreases the supply increases. This means that there are more properties to be sold and more sellers in the market than the buyers.
So, what happens is, when people are not able to qualify for mortgages, they are not able to generate funds to buy properties, as a result of which the demand decreases but the supply increases.
When there is lesser demand and more supply, that means when there is no one to buy properties, then the prices of the properties will reduce.
So, when the interest rate increases the prices of the properties reduce.
Secondly, people take out their investment from the properties and put their money in the banks to earn profit from the high-interest rates. So, this also leads to an increase in the supply of properties as there is no one to buy them. When there is more supply the property prices decrease.
Prices of the Under-construction Projects Increase
Since the under-construction projects are available in installments they give a good opportunity to people.
All the people who would earlier go to banks for the mortgage but are unable to qualify for it now go to the developers of these under-construction projects and ask them for installments.
So, the demand for under-construction projects increases. Thus, if you had invested in under-construction projects, you will start to earn profits due to their price appreciation.
High Demand for Rent
When most people are not able to buy their own houses, they prefer to take houses on rent. So, because the demand for rental buildings will increase, their prices will also increase. Similarly, the demand for other cash-flow generating properties will also increase.
So, when the interest rates are high, lesser people are able to take loans. This causes an increase in property supply because not many people are buying properties.
An increase in the supply of properties leads to a decrease in its prices. On the other hand, the demand for under-construction projects increases because people can afford to buy them in installments.
What Happens When the Interest Rates are Low?
Wen the interest rates are low, the exact opposite of the above-mentioned effect happens. It is briefly explained below.
When there will be a low-interest rate the price of the installment will decrease at the banks. So, if a person was previously paying PKR 1.5 lac as installment, now he will have to pay PKR 1 lac only. So, such a person will run to buy a property by taking loans from the banks.
Demand Will Increase and the Prices Appreciate
When there are more people willing to take loans and buy properties the demand for the properties will increase. Secondly, because the interest rate is low, the value of the money resting in the bank decreases.
So, people take their money out of the banks and invest it in real estate. This also leads to an increase in the demand for properties which will lead to an increase in the price as well.
Demand for Under-Construction Projects Decreases
The demand for under-construction projects decreases because people can buy a completely built house in the same amount of money as that of an under-construction house.
So, people prefer to buy a completely developed property instead. The investment of the under-construction will not appear to be more lucrative.
Thus, the demand for the under-construction projects decreases, and their prices also reduce.
Demand for Rental Properties Decreases
When most people are buying their own houses the demand for rental properties decreases. Property owners in the market increase and the tenants decrease. But, another factor that affects this phenomenon is the inventory of your area because the inventory also determines the demand and supply of the properties.
So, you need to keep a track of the interest rates and market’s price cycle to invest wisely. Whether the interest rates are high or low, you should know how you can make the most out of any situation. Choose a suitable investment according to the interest rates and market conditions.