From house prices to your savings, key factors in how higher interest rates will affect the real economy
European Central Bank (ECB) President Christine Lagarde on Monday made the clearest forecast yet that the era of ultra-low interest rates will end this summer. By the end of September, the ECB will no longer charge banks for storing their money overnight, Ms Lagarde suggested.
This will be the start of a rare normalization of public interest – including the ECB’s return to its traditional practice of charging banks that lend it money.
All other things being equal, higher interest rates have traditionally weighed on home prices as higher borrowing costs limit the purchasing power of homebuyers. How this really affects real estate prices is, according to Dr. John McCartney, Head of Research at BNP Paribas Real Estate in Ireland.
“There are a lot of moving parts,” he said. Overall, however, the expected rate hikes come as signs that population growth has slowed and housing production is picking up, which would also lead to a modest rise in house prices, he said.
Once official interest rates rise, existing homeowners can also expect their borrowing costs to increase if they have a tracker or an adjustable-rate home loan.
Over time, fixed rate loan products will increase for new borrowers and at maturity.
While low interest rates buoy borrowers, they hurt savers. Rate hikes have the opposite effect.
Since the start of the pandemic, Irish banks have been hit by a perfect storm as household and business savings have soared but borrowing has slowed.
Banks were stuffed with cash and forced to hold billions of euros at the ECB, where negative interest rates meant the banks themselves were losing money.
Even if negative interest is removed, savers can probably expect a delay before they see their own interest income increase, but ultimately there will be a better return.
The end of the negative ECB interest rate will plug a financial leak for them. They will also see a rise in margins as increases in tracker mortgage customer lending rates and commercial borrower lending rates take hold.
Banks’ access to customer savings, which tend to revalue much more slowly than the rest of the financial market, will give them a boost compared to so-called non-bank mortgage lenders who raise money for their customers by borrowing from the markets.
That’s good for bank stocks and could help the government’s efforts to sell its stake in AIB.
On the other hand, one reason central banks are cautious about raising interest rates is the pressure they are putting on the economy.
A higher interest bill can leave personal and business borrowers in financial distress.
Diarmaid Sheridan, analyst at Davy Stockbrokers, says rate hikes shouldn’t be the main trigger for financial troubles this time around. Interest rates are at all-time lows, so gains should be manageable barring other factors such as job losses or bearish trade.
Institutional real estate investors from Germany and the Netherlands flocked to Ireland when negative interest rates prevented them from earning returns on bonds and real estate in their home markets.
Higher interest rates could change investment patterns but not trigger a rush into the Irish market, said John McCartney.
He believes the funds will stay put because apartment block rents and logistic parks (beds and sheds) now look like a good bet to weather a potential storm.
Ireland’s young and growing population makes it relatively attractive compared to other EU markets, he said.
https://www.independent.ie/business/from-house-prices-to-your-savings-key-ways-higher-interest-rates-will-affect-the-real-economy-41681061.html From house prices to your savings, key factors in how higher interest rates will affect the real economy