Common sense tells us that if everyone is able to borrow a lot of money with very low interest rates, there will be fierce competition for scarce assets.
So, as interest rate reached record lows, prospective property purchasers found it increasingly difficult to buy a home. Auctions yielding crazy prices and competing buyers made sellers achieve well in excess of listed prices.
Fast forward to 2022, and interest rates began to rise. This immediately reduces borrowing capacity, and eventually, it also affects buying confidence (will there be more rises or will it be cheaper to buy in six months etc). It took a while to sink in across Australia and there now have been significant falls in house prices. CoreLogic’s national Home Value Index has now fallen 5.3% over the 2022 calendar year with most forecasters expecting further falls through 2023.
Similarly, in the commercial and industrial property sector, interest rate changes can and should affect valuations and returns.
Interestingly, in Australia, listed real estate trusts fell in value by 20.46% in the 12 months to the 31st of December 2022. This is even after an 11.5% rise in the last three months of that year!
Amazingly unlisted property actually increased in value over the same period. Those independent valuations are a great level of comfort for everyone wanting to fly in the face of common sense.