Generally speaking, if you’re looking for a safe bet in terms of securing a healthy ROI on an investment, property is the way to go. Over the last couple of years however, that hasn’t always been the case.
As a result of the challenges facing global economies, the last few years have been tough on the property and real estate markets. With global conflicts, disruption to supply chains, rising energy prices, cost of living crises, political unrest, record high rates of inflation, and rising interest rates, real estate markets took a real pounding.
As we approach the latter half of 2024 however, there is cautious optimism that H2 could prove to be significantly kinder on the property markets, than the last couple of years have been. But with the FED still dragging their heels on cutting interest rates, and rates in other countries still much higher than they have been in years, how will this impact the property markets?
High Interest Rates and Real Estate at a Glance
Before we cast our gaze ahead and look at what the remainder of 2024 could have in store for property markets and property investors in general, we first need to understand why high interest rates are so disruptive for the real estate markets.
As a result of numerous factors over the last four years, we’ve watched inflation levels rise to record highs, both globally and nationally. When inflation rises, so too does the cost of everything else, which is part of the reason why we’re still in the midst of a cost-of-living crisis.
Rising prices mean that people are spending more money on living, so they have less disposable income. This means people spend less, businesses suffer, the economy suffers, and unemployment generally rises. For the economy, this is disastrous.
As a result of inflation levels jumping so high (peaking at 11.2% in the UK in October 2022, and 9.1% in the US) monetary regulators were forced to step in and hike interest rates in a bid to bring inflation down. In the US, the Federal Reserve (FED) hiked interest rates 11 times between 2022 and 2023. In the UK, the Bank of England (BoE) followed suit, hiking interest rates 14 times to 5.25%. In the EU, the European Central Bank increased base rates 10 times, though these are now on the way down.
In terms of property markets, high interest rates are not conducive because they slow down the property markets and make mortgages more expensive. Paying 7% interest on a 30-year fixed rate $800K mortgage for example, is going to cost more each month than paying 4% interest on that same figure. Not as many people can afford to buy, meaning that growth stagnates as there is less demand for property. Instead, people turn to renting, which in turn drives up rental prices, making it harder for people to save money for deposits and downpayments on property.
Property Market Trends and Prospects for 2024
As inflation finally appears to not only be falling, but stabilizing as well, interest rate cuts around the globe will almost certainly be on the agenda. But how have rising interest rates influenced the markets and what can we expect for the remainder of the financial year?
Here are several property market trends and prospects for 2024.
Rental Growth Exceeding Expectations
Because of the fact that fewer people can afford to take out mortgages when interest rates are so high, they have instead turned to renting. This has helped to drive rental growth around the globe, resulting in figures exceeding expectations compared with the start of the year.
In Europe for example, economies are finally showing signs of improving. This in turn will spur occupier demand. Experts predict rental growth trajectories will diverge due to market dynamics and economic cycles.
There are, however, some concerns as countries such as Spain for example, could see elevated levels of supply curtail potential rental increases.
Nordic markets are looking the most vulnerable due to struggling economically over the last couple of years. Recovery is therefore predicted to be slower. It isn’t all doom and gloom however, as when they do recover, thanks to a harshly restricted supply pipeline, rental growth rebounds could be significant.
Retail Property Looking Promising to Investors
When people think of real estate, typically they first think of housing. You should not however, overlook the potential of retail property.
Experts have noted an increase in demand for retail property, particularly across Europe, as investors are purchasing distressed properties at a reduced rate, repurposing and renovating them, and taking advantage of the price corrections we’ve seen over the last couple of years.
As consumer confidence improves, economies stage a recovery, and interest rates are cut, this particular sector should see elevated levels of activity.
Green is the New Green
Another real estate market trend we’ve seen in the US, UK, and across the EU, is an increase in investors targeting energy-efficient buildings.
As the world transitions over to energy-efficiency, and with the EU in particular, pushing hard for decarbonization, eco-friendly and energy-efficient properties are looking increasingly appealing to investors, particularly across Europe.
Homebuyers Set to Return (Slowly)
By now you understand why high interest rates are damaging for people with mortgages or looking to get a mortgage, so naturally as interest rates fall, we should see homebuyers return.
With mortgage rates set to fall below 7%, when this happens, we should see a gradual return of people re-entering the housing market. Economists and investors alike would ideally like to see this happen gradually, otherwise we run the risk of a housing market boom.
Not only would this be beneficial from a property investment perspective, it would also help alleviate rental inflation, which many predict has peaked. This would then bring core inflation down and increase the likelihood of the FED, BoE and other monetary policy makers cutting interest rates even further.
The FED however, who have been extremely cautious with regard to cutting interest rates (perhaps overly so) will be looking to do everything in their power to avoid a housing market boom, so investors looking to invest in property should do so with the goal of securing modest long-term gains.
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