Why Interest Rate Fluctuations Shouldn’t Deter Property Investors.
With yesterday’s announcement from the Bank of England increasing interest rates to 5%, we wanted to provide some reassurance to investors and explain why such hikes in interest rates are not the be-all and end-all for property investors. It’s easy to get lost amongst all of the adverse press from the media so some clarity around the facts is required. While interest rate hikes may have an impact on borrowing costs, there are several reasons why property investors can still find success in a rising interest rate environment. The prospect of interest rate hikes can often send ripples of concern through the real estate market, particularly among property investors. However, it’s important to remember that interest rate adjustments should not necessarily deter savvy investors from pursuing property investments. In this article, we will look at a few of the reasons why.
Long-term Investment Strategy
Property investment is generally a long-term game, and investors should focus on the broader economic landscape rather than short-term interest rate fluctuations. Over time, real estate has proven to be a reliable asset class that can generate steady returns and act as a hedge against inflation. By adopting a long-term investment strategy, property investors can ride out short-term interest rate hikes and benefit from the long-term appreciation of their properties.
Strong Rental Demand
Diversification is a fundamental principle in investment, and property investors can employ this strategy to minimize the impact of interest rate hikes. By spreading investments across various property types, locations, and financing structures, investors can reduce their exposure to interest rate fluctuations. For example, investing in both residential and commercial properties, or opting for fixed-rate mortgages, can provide stability and mitigate the risks associated with rising interest rates. At Opulent we are seeing a sharp increase in the number of commercial student accommodation units that are being sold simply because savvy investors are buying those with cash to generate an above-average income that in turn is used to subsidise some of the increased monthly mortgage payments caused by interest rate hikes.
Negotiating Power
Moreover, the city’s property market has exhibited impressive capital appreciation over the years, providing investors with the prospect of attractive returns on their investments.
Inflation Hedge
Interest rate hikes are often implemented by central banks as a response to inflationary pressures in the economy. Real estate has historically been considered a reliable hedge against inflation. As prices rise across various sectors, property values and rental income tend to follow suit. Property investors can benefit from the appreciation of their assets and the preservation of their purchasing power in the face of inflation.
Supply v Demand
It’s important that amidst all of the press around interest rates, investors do not lose sight of the fundamental fact that in the UK demand for property far outstrips supply and that housebuilding in the UK currently is at its lowest level since 1920. There is an ever-widening gap between supply and demand which means irrespective of a recession or irrespective of interest rate fluctuations, property prices in the UK will always rebound and increase in value. The gains to be made from capital appreciation will be more significant than the losses caused by interest rate fluctuations thus shouldn’t put off investors from purchasing.
While interest rate hikes may initially raise concerns among property investors, a holistic perspective reveals that they should not be a deterrent to pursuing real estate investments. By adopting a long-term investment strategy, diversifying their portfolio, taking advantage of strong rental demand, leveraging negotiating power, using real estate as an inflation hedge, and understanding the supply v demand of new properties, investors can navigate a rising interest rate environment successfully. As with any investment, thorough research, careful planning, and financial prudence remain crucial to achieving long-term success in the property market.