Challenges and Opportunities in Residential Real Estate
The global real estate market was valued at $300 trillion in 2021, and is projected to reach $500 trillion by 2031, registering an annual growth of 5.3% from 2022 to 2031.
The real estate market includes buying and selling of residential, commercial, and industrial properties such as flats, bungalows, offices and villas.
The real estate industry is mainly driven by urbanization in developing countries. People from small villages and towns are migrated to cities to improve their living standards.
In addition, the increase in industries around large cities has led to significant expansion of cities. Governments of several nations such as the US offered real estate loans at lower rates for long term and concession for first time home buyers, respectively.
In addition, governments of several other nations such as Poland, Portugal, the US, and Canada offered schemes such as Golden Visa and affordable housing schemes to encourage buyers.
Moreover, large number of tourist destinations in countries such as France, the Netherlands, Dubai, Singapore, and Malaysia also attract real estate buyers.
The market has witnessed significant growth over the past decade, owing to increase in the land-related real estate transaction in the commercial, industrial, and residential projects around the globe.
During the outbreak of the COVID-19 pandemic, construction, supply chains, manufacturing, hotel, and tourism industries were significantly affected. This led to decline in construction activities, thereby restraining the growth of the real estate market. Conversely, industries are gradually resuming their regular manufacturing and services. This is expected to lead to re-initiation of real estate companies at their full-scale capacities, by end of 2023.
The Residential Market
The Residential Real estate market is the largest sector in the world and is about 16% of world GDP and 80% of all Global Real Estate Assets.
Aligned with research published by “Residential Real Estate Market – Growth, Trends, COVID-19 Impact, and Forecasts (2022 – 2027)” report, The Residential Real estate market-Global is expected an annual growth rate of more 9% from 2023 -2027.
Residential real estate (RRE) markets were impacted by the COVID-19 pandemic in several ways. On the one hand, lockdowns and the increased use of remote working practices increased demand for RRE, on the other hand, the economic downturn and the demand for workers are expected to weigh negatively on demand. Due to lockdowns most of the construction activity and property transactions came to halt, in 2021 as soon as the Lockdown relaxation took place, the Residential real estate market surged.
The Residential real estate market is the cornerstone of the wellbeing of any economy. Shelter is considered as a basic need for humans and lies at the base of the famous hierarchy of needs pyramid (Maslow). Therefore, it is understood that the way the residential real estate market moves, has a rippling effect on families around the world.
Residential properties such as apartments, bungalows, and villas are bought and sold on the market. The residential real estate market in emerging nations is mostly driven by urbanization. Major cities in emerging nations such as India, China, Brazil, Argentina, and South Africa, among others, are fast expanding and require additional housing to accommodate people migrating from various regions of the country.
Furthermore, government measures promoting affordable housing stimulate market expansion. For example, governments in Australia, the United States, and Canada have planned strategies such as concessions for first-time buyers, veterans’ subsidies, golden visas, low-cost affordable housing schemes, and a reduction in transactional taxes, all of which are expected to boost growth in the residential real estate market. Historical low mortgage interest rates also fueled the residential real estate market in countries like US, Canada, India, Australia etc.
How Interest Rates Affect the Real Estate Market
Interest rates rises affect the real estate market in various ways. No matter if you’re a buyer or a seller the interest rate is a driving force behind economies.
Simply put, interest rates represent the price you pay for borrowing someone else’s money. The amount you’ll need to pay reflects our financial capabilities. Every country has its regulatory institution that adjusts interest rates to speed up or slow down economic activity. In the US, that’s the Federal Reserve, and in European countries that use EUR as their national currency, these regulations are done by the European Central Bank.
Ultimately, the cost of borrowing money influences the real estate market and the economy.
The general rule of thumb in the real estate business states that the rising interest rates make buying or selling a home much more difficult.
The reason is that higher interest rates mean your monthly mortgage payments will be higher too. Let’s give you an example: you’re looking to buy a $500 000 home on a 30-year fixed mortgage. If the interest rate was 4% you’d be paying $2 387 towards your monthly mortgage payments.
Now, let’s say the interest rate rises to 5%. For an increase of only 1%, you’d have to pay $2 684 (an extra $297) every month.
That’s why people are hesitant to invest in real estate when the interest rates are rising. From the buyer’s perspective, the higher the rates, the less affordable the property becomes. Of course, as demand and supply are two closely related economic phenomena, changes in interest rates affect the sellers too.
If you’re trying to sell, the rising interest rates would affect us a bit more indirectly. For example, if we want to sell our property for $500 000, nothing can stop us from setting that price. However, if there’s nobody out there who can afford it, we may be forced to lower our prices or give up on selling at that time-point.
On the other hand, when the interest rates drop, the buyer’s purchasing power rises. This means we will be able to price our real estate at a higher price and still have someone willing to buy it.
So, while there’s nothing, we can do about interest rate fluctuations, it’s still important to consider it all when forming the final pricing for our property.
Residential Real estate as an investment
When it comes to real estate investments, rising interest rates can have a positive impact. Lower housing prices and fewer people being able to qualify for a mortgage means a higher demand for rental properties. So, investing in a rental property when the interest rates are rising might be the optimal time to do it.
Of course, the same goes if you’re planning on reselling the property afterward. Since the sellers will be forced to keep their prices low, all you need to do is to buy and wait until the interest rates decrease again.
So, even our 1% increase in interest can be a great opportunity for profit when you’re an investor.