In September, the Fed made the highest rate hike since the 1990s. The decision to increase interest rates to combat inflation made borrowing more expensive, affecting many sectors, including the real estate sector. So, how does the FED’s decision to increase the interest rate, which narrows the market by making it difficult to get loans, affect the real estate sector?
Why Does the Fed Increase Interest Rates?
The FED is responsible for maintaining price stability in the market and protecting the value of the local currency by regulating interest rates. The FED committee, which meets on average 8 times a year and decides on interest rates, concludes this decision by looking at many analyzes such as global inflation data and employment details in the country. When the FED wants to encourage growth, it offers advantageous loan opportunities by lowering interest rates. This means increasing spending by making new initiatives for companies and individuals.
In an environment where inflation increases and uncontrolled growth is risky, the FED raises borrowing costs by increasing interest rates. This decision, which prevents the markets from overheating by putting the brakes on actions such as taking out loans and investing, balances the economy by shrinking it. All developments such as the increase in money costs and the threat of recession in the world economy due to the Covid recession are effective in the FED’s decision to increase interest rates. Problems such as the limited supply of housing, which emerged due to the increase in energy costs as a result of inflation, have made it necessary to follow the real estate sector together with advanced real estate programs today.
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How High-Interest Rates Affect the Real Estate Industry?
Interest rates, which are the best tool in the hands of the FED in the fight against inflation, affect not only the American economy but also global markets. The effects of interest increase are observed in all areas such as credit card bills, car and housing loans. Inflation, which is one of the biggest problems of specially developed countries’ economies, has caused the rapidly increasing housing need across the world to face a limited supply problem. Therefore, the decision to increase the interest rate has a direct impact on the real estate sector.
The increase in interest rates balances the increasing demand in the real estate market, especially in recent years, and leads consumers and businesses to spend less. In this environment where credit costs are also increasing, most people avoid payments that will strain their household incomes, turn to savings and delay new purchases. Therefore, rising housing prices reduce the excessive demand for real estate over time, cooling the market and helping to stabilize prices in the medium-long term. However, problems such as increased energy costs due to inflation, supply problems that accelerated after the Covid period, and raw material shortages after the war still affect the real estate sector. Therefore, in this environment where the general purchasing power has decreased and the pandemic shock continues, new investment decisions must be made as a result of long analyzes.
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