Blog: How an Increase in Interest Rate Can Hinder Growth of Real Estate Market
Although there hasn’t been a huge rise in the inflation, the interest rates are predicted to increase substantially in the next 3 or 5 years. The looming national debt of the country and the government deficits may discourage all of the foreign countries from purchasing the US Treasuries, thereby causing a rise in inflation of about 2.5% to 3%. As a result of the inflation, there can be a rise in the cost of most of the items like food prices, cost of everyday items, clothes, medicines cosmetics, and even the mortgage loans.
Effect or rise in interest rate
According to the industry commentators, there may be a further rise in the Base Rate which could lead to the increase in the borrowing costs, thereby hindering the growth of the Commercial Real Estate Markets. This is because, the interest rates are the effective costs of borrowing money at any point of time.
If the inflation rate is set to rise the banks will increase the interest rates. As a result, fewer people would take out mortgage loans and in turn the growth of the real estate market will suffer too. So, what are the various effects of rise of interest rate on the growth of real estate market?
- Increased mortgage payments – With the increase in the interest rates, it is quite obvious there will be an increase in the costs of getting mortgage loans. This is because, if the interest rate increases the mortgage payments will increase too.
- Lowered demand for mortgages – As there will be an increase in the cost of the mortgage, the demand for the mortgage loans will lower. This is because with the rise in inflation, and with the state of today’s economy people may not be able to handle all the high costs. So, it is probable that they would shun mortgage loans.
- Lowered demand for housing – As fewer people will be able to afford mortgage loans, so it is quite obvious that the demand for housing will lower too. Thus, the growth of the real estate market is going to suffer badly.
Almost all of the people depend on mortgage loans for buying a house and so if the interest rates increase, people will not be able to afford to take out a mortgage and thus they will not be able to buy a home too. People will rather rent than buy and so the market will suffer. Not only individuals, the investors too will lower mortgage loan borrowings. Most of the investors too depend a lot on the mortgage loans offered by the banks. So, it is quite obvious that an increase in the interest rate will lead to negative growth of the real estate industry. For more follow https://www.facebook.com/mortgageforyou