Economic Clock is Ticking!

Economic Clock is Ticking!

There has been much talk in recent times of future interest rate increases.

Low interest rates have undoubtedly fuelled property market for a long time now, especially when this has been combined with easier money lending conditions.

Some people say that the lowest interest rates equal the highest prices. There is some truth to this.

In time, rising interest rates and tighter lending policies will dampen price growth. Bank records show that interest rates have averaged over 10% during the last 150 years. So if history is anything to go by, interest rates will rise at some point. When this will happen is always the big question.

It is interesting to note that low interest rate times can be very dangerous because any change represents a large percentage change. For example, a 1% increase on an interest rate of 5% is a 20% increase, which is a massive percentage increase.

For instance, an industrial investment returning $100,000 pa which sold on a yield of 6% could only sell at 8% at a later date, if interest rate increases go up by 2% (which is what some banks are factoring in as safe currently). This would be a 25% drop in capital value. Of course, this does not mean the tenant would not pay the rent — it simply means the underlying capital value has decreased.

While many are borrowing as much as they can, what should astute people do? Well many factors come into each person’s situation, so personal decisions need to be made.

It’s certainly an excellent time to pay down debt when interest rates are low. Being liquid in times when other people are not, means you are well placed when cash is king to buy at attractive prices, maybe even bargains.

Posted on Thursday, 16 November 2017
by Atholl Williams in Latest News

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