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Higher interest rates means higher or lower property prices?

Higher interest rates means higher or lower property prices?

When interest rates go up, cost of borrowing increases

Briefly, if interest rates are raised by Bank Negara Malaysia (BNM) in H2 2022 as per forecasted (earlier article here about when it will rise), it means that the cost of borrowing increases. For people with an existing home loan, it means higher repayment is now necessary. May not be a lot for those with one property but if the property is currently being rented out with a negative yield, then this negative yield will become worse.

Now imagine the scenario for a home owner with 2 properties or someone with 3, 4 or 5 properties. Even worse, for a home owner who is paying but is unable to rent out the property yet. This is why the decision of whether to increase the interest rate (BNM calls it the overnight policy rate; OPR) is not an easy one to make. It may affect not just the businesses but also the working people too.

What about people intending to take a home loan?

For people intending to take a home loan, it means two things. They can still continue with the purchase for a property of the same price and paying a slightly higher monthly repayment because of higher interest or they could also choose to keep the monthly repayment by buying a cheaper property instead. How would this affect the property price then if this is how the potential buyer will decide?

Well, the buyer’s decision would also have to depend on the decision of the seller. In a demand and supply equation, how the price would move really depend on whether seller or the buyer has stronger negotiation power.

What happens at the seller’s side?

Let’s look at the seller side too. If the interest rate is increased, it means that their potential buyer may ask for a lower price from the owner so that the potential buyer could have the same monthly repayment amount despite a higher interest rate. If the owner refused to reduce the property selling price, that means the buyer would have to fork out a higher downpayment and also have a higher repayment every month.

Who will win in this negotiation?

Seller wants to maintain or sell higher while buyer wants a lower price or they may choose to move away from the purchase because they do not fancy paying higher than what they were prepared to pay. If the property is a sought after property, the seller usually wins because the number of buyers are more than supply of properties for sale. Usually these would be the more popular and mature neighbourhoods.

However if the property is at a less sought after location, the potential buyer may win because there are more choices and there are also other similar locations too. If the property is a new one and the developer has unsold units, then the seller loses all negotiation power because the property developer is more likely to ensure potential buyers are not scared off just because of higher interest rates.

Interest Rates and the Property Price movement

This is why interest rates up does not mean property prices would immediately rise or fall. In fact there’s always the double-whammy for property buyers too. Interest rates are up but the sellers may have very strong negotiation power and the buyers may then be forced to pay the same price and yet with higher monthly repayments.

In many countries, especially some advanced ones, this is already happening. Somehow, the buyers are usually at the weaker end of the negotiation table. Malaysians are considered lucky as choices remain aplenty in many less popular areas. Thus when interest rates go up, the prices may not follow. Happy evaluating and buying that property of your choice.

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