Where are interest rates going?

I have no idea and anyone who says they know for certain is either:

  1. A liar; or
  2. Should be trading interest rate futures on Wall Street

That said, having a view on interest rates is pretty important in our business.

Why? Because the price of income producing real estate is highly dependent upon the cost of borrowing money.

If interest rates move up, cap rates (the “unlevered return”) move up, and the price of income producing real estate falls. If interest rates drop, cap rates drop, and the price of income producing real estate rises. (For more on this subject, check out this post.)

Given that the future prices of the assets I invest in are heavily dependent on interest rates, I have to have a view, so:

  • Believe we’re in for a period of sustained low rates
  • This is due to a huge glut of savings (worldwide, but also among baby-boomers who are all at peak net worth right now) chasing returns… eg competing to loan money
  • Also do to sustained weakness in almost all of the major developed economies, with the exception of the US
  • Persistently low inflation in the US, causing the Fed to fear deflation (as happened in Japan)

I have no idea if the above is correct. And, even if it is, it doesn’t mean rates will stay as low as they are now… just that it will be a long time before mortgages are 6-7% again.