The latest minutes from the US Federal Reserve meeting have cast a very dark shadow across equity markets last week. There is a real chance that US interest rates could increase in June as the Fed looks to offset a strong economy. Initially markets had expected US interest rates to rise no earlier than September but futures markets are now factoring in a one third possibility of a rise next month. So, how would this impact the US property market and the worldwide economy?
US property prices
In general US property prices have remained relatively strong since the last US interest rate rise although there have been signs of some markets running out of steam. The obvious impact of a US interest rate rise would be to increase the cost of borrowing which would in turn reduce the funds available for the purchase of US real estate. However, there are other underlying factors which are impacting the US real estate market.
It is common knowledge that Chinese real estate investors have been pouring billions of dollars into the US real estate market. Problems with the Chinese economy have forced many investors to look elsewhere and the US property market has become a magnet for literally hundreds of billions of dollars from worldwide investors. This is likely to continue for some time to come but there may well be more challenges if, as expected, US interest rates increase sooner rather than later.
A strong dollar would make it less competitive for overseas investors as they would receive fewer dollars in exchange for their domestic currency. When you bear a mind the current economic challenges in China we are unlikely to see any real strengthening of the Chinese currency in the short term which may well cause some Chinese real estate investors to pause for thought.
The International Monetary Fund recently reduced its forecast for worldwide economic growth from 3.4% down to 3.2%. This is relatively little improvement on the 3.1% seen in 2015 and there is more chance of a downgrade in the short to medium term than an upgrade. Any increase in US interest rates would also impact companies who have taken out debt in US dollars to ride out the economic storm of recent years. An increase in their dollar loan repayments would place more pressure on balance sheets and could have a knock-on effect to worldwide economic growth in the short to medium term.
Equity markets have reacted negatively to the possibility of US interest rate rise in June even though this is not a certainty as yet. There had been hopes that the US Federal Reserve would actually look to reduce US base rates in the short term after what many saw as a pre-emptive rise just a few months ago. However, it seems that the US economy is now back on track, confidence is growing and there may well be a need to increase US base rates to control “exuberant” investors.