Rising interest rates have multidimensional effects on the real estate market, affecting everything from access to credit to the evolution of supply and demand curves.
Below are some of its direct and indirect effects on housing prices, followed by a brief final personal reflection.
DIRECT EFFECTS
Reduction in purchasing power.
Rising interest rates increase the monthly cost of mortgages, limiting buyers' ability to borrow.
In the case of investment in rental properties, rising interest rates reduce the financing margin, as a larger proportion of the investor's income must be allocated to mortgage payments. Faced with this situation, investors often choose between two alternatives: assuming a larger portion of the investment with their own capital or seeking more competitively priced properties.
An interesting option in this context is to explore emerging real estate markets with potential for appreciation, such as high-end urban development projects under development, for example. Larimar City & Resort, which offers attractive opportunities for both residence and investment.
Downward pressure on prices.
Historically, rising interest rates have been correlated with falling housing prices due to a decline in buyers' purchasing power. However, in the current context, this trend is not clearly reflected. The reason is that demand far exceeds the supply of new homes, which keeps prices rising despite the rise in credit prices.
INDIRECT EFFECTS
Impact on housing supply.
High interest rates make it more expensive for real estate developers to access financing, which can lead to a reduction in new home construction or the transfer of increased costs to the final price for buyers.
Additionally, in markets with strong demand, this supply contraction can become a catalyst that further drives prices up.
Rising rents.
As mentioned above, rising interest rates primarily affect variable-rate mortgages. Owners who purchased properties to rent out and see their financing costs rise can pass this increase on to rental prices. At the same time, the difficulty in accessing credit for home purchases is leading a greater number of people to postpone the purchase of their first property, increasing demand for rentals and, consequently, driving up rental prices.
CONCLUSIONS
- Rising interest rates act as a filter in the real estate market, limiting access for younger buyers and strengthening investors with greater capital to invest.
- Despite rising interest rates, housing prices continue their upward trend. This is largely due to the shortage of new housing supply following the financial crisis, while households have accumulated savings. In particular, the 55-65 age group demonstrates a high investment capacity, absorbing a large portion of the available supply. Furthermore, it has been proven that the main motivation for these investments is to seek a supplement to their retirement that allows them to maintain a good standard of living.
- The difficulty in accessing credit reinforces the appeal of real estate investment for those with available capital. In inflationary environments, housing is perceived as a safe haven, and the growing demand for rentals, driven by limited credit, puts additional pressure on rental prices.
Therefore, it is worth analyzing Why invest in well-planned real estate destinations It can be a wise decision, especially when they combine long-term vision, tax advantages and high projected demand.
By Alvaro Meca,
Deputy Director
Larimar City & Resort