Could rising Interest Rates spark off a Property Crash in 2018?

Tadhg Gaelach

Premium Account
Jan 14, 2016

Incredibly, property prices in the developed countries are now higher than they were before the crash of 2008. As the Financial Times notes today, much of the property boom in the last few years is driven by Vulture Funds like Goldman Sachs being able to borrow at almost zero interest rates and buy up hundreds of thousands of homes and commercial buildings. But interest rates have been quickly rising over the last few months. A recent sell off in the bond market has driven rate up to highs not seen in years.

All of this means that its no longer profitable for the Vulture Funds to buy and own property. Indeed, the FT reports that property was the worst earning sector in 2017, despite low interest rates. If the Vulture Funds were all to dump their properties, there would be a terrific crash. And young people who have bought in the last few years will be thrown into the nightmare of negative equity - even as their interest payments are increasing.

Real estate stocks have tumbled since the start of the year as rapidly rising Treasury yields have rocked the rate-sensitive sector. The real estate sector of the S&P 500 dipped 0.8 per cent by midsession on Friday, taking its year to date decline to nearly 5.4 per cent and making it the worst performing sector of the broader index. The S&P 500 rose by 0.6 per cent to 2,782. The downturn in the real estate sector comes as benchmark 10-year Treasury yields have risen by 15 basis points since the start of the year to 2.56 per cent.

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