Quantitative Easing is Coming to an End: What Does it Mean for Interest Rates and Real Estate?
Despite the long period of economic weakness created by the GFC, real estate has remained in high demand and capitalization rates have fallen substantially. Some economists argue that this is due to emergency stimulus by central banks—a policy known as “quantitative easing” (QE). As interest rates on government bonds have fallen to extremely low levels, investors have turned to the next most secure asset—real estate.
Over the past 12 months, the global economy has returned to robust growth, and central banks have signaled an end to QE and the start of quantitative tightening (QT). While QE is being unwound slowly and cautiously, there is a strong desire by central banks and some politicians to push interest rates back to their normal levels.
No one is very clear about what interest rate “normalization” means. In part, it implies a world in which people can get a relatively good interest rate on their savings. It also means that central banks would cease to buy government bonds, allowing the market to set long-term interest rates. In all, normalization implies that interest rates will return to pre-GFC levels. At the peak of the last interest-rate cycle in 2006, the U.S. federal funds rate was 5.25% and 10-year Treasury bill yields reached 5%. Interest rates in the U.K. were even higher.
"As interest rates on government bonds fell to extremely low levels, investors turned to the next most secure asset—real estate."
A return to these interest-rate levels would have serious implications for real estate, but will it actually occur?
CBRE Research concludes that interest rates were falling long before the GFC, due to global demographic factors. These powerful factors remain in play and will limit the extent to which central banks or politicians can raise interest rates. This is good news for real estate, but it also suggests that savers will continue to receive only a meager return on their cash.
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