There is growing speculation that the US Federal Reserve is on the verge of increasing US base rates which would be the first increase since the 2008 recession began. There have been some concerns expressed by investors about the impact this could have on the US property market but it is inevitable at some point. So, would an increase in US base rate impact the property market?
While the US economy is certainly moving towards the right path the recent performance has been patchy at best. On one hand we have relatively cheap funds available while on the other the banking community is still concerned about increasing its customer risk profile after lessons learned in years gone by. It would certainly be an indicator that the US government expects renewed economic growth if the Federal Reserve was to increase base rates in the short term and perhaps it would finally put an end to the speculation regarding the first US base rate increase since the recession?
When we talk about the US property market it is difficult to talk about it in general terms because it is absolutely huge with each market having very different characteristics. Perhaps the main talking point is the increase in finance costs which would follow an increase in US base rates and the impact this would have on investment returns. This would obviously assist in controlling some of the “hot” property markets of the day although it could potentially be damaging for those still struggling to move forward.
Medium to long-term considerations
Any short-term increase in US base rates is unlikely to be the first of a rapid rise to historical levels. The economy is still patchy, investors are still cautious and with areas such as China (now one of the main economies of the world) experiencing significant challenges there is no certainty that the worldwide economy could not slip back in the short to medium term. It is extremely unlikely that any rise in US base rates would be reversed in the short to medium term but it would take away some of the confusion and uncertainty from investment markets.
As we have touched on time and time again, investors like certainty because at least even in a worst-case scenario they can value assets on a set basis. Where there is uncertainty, will base rates rise or will they remain the same, it is very difficult to put a definitive valuation on any asset.
On the plus side
The US Federal Reserve would only ever increase US base rates if it were certain the economy was over the worst and there was a need to subdue areas such as hot property markets. This in itself could be seen as a long-term positive although with so much uncertainty in the short to medium term some investors may take a different opinion. However, it would certainly take away the uncertainty surrounding the will they/won’t they increase US base rates in the short term.