Can Rising Interest Rates Cause Rents To Fall?
Inflation impacts the economy in many ways, but one of the biggest ways we can feel the effects of inflation is through the changes in interest rates. The question gets asked, “Can rising interest rates cause rents to fall?” Higher interest rates make it harder for people to qualify for the mortgages they need to purchase property. We’ll examine how that can affect the rental market.
Rising Interest Rates In California Can Effect Rents But Not Necessarily Cause Them To Fall
California homebuyers feel the effects when they go to apply for a mortgage and find that interest rates are hovering around 5.98%. Causing the thought of whether rising interest rates will cause rents to fall. This increase makes renting a more affordable option for many, which then increases demand for rental properties. When the demand for something rises and the supply stays the same (or decreases) the natural result is higher prices.
Inflation and Interest Rates Can Effect Rents
Usually, when interest rates go up, so does rent. The rising cost of mortgages and property expenses means investors have to pass the expenses onto their renters. Usually in the form of higher rental prices. And, unfortunately for renters, when interest rates go down, rental rates usually stay the same. All within local rent control ordinances of course. Sometimes, even when interest rates drop, rents increase because of other economic factors. Like local supply and demand or a change in local demographics.
This is all good news for investors. The theory that real estate acts as a hedge against inflation still rings true. Even during a time when our economy is as volatile as it is right now.
At the beginning of 2020, we saw rental prices drop significantly. Especially in multi-family property in the country’s most urban areas. People were nervous about living in shared spaces and sharing amenities with strangers.They wanted more room to practice social distancing. Then in 2021, when things settled a bit, the demand for these apartments was back up, people moved back in, and rental prices went back up. Rent inflation caused rental rates for single-family homes to go up 26% in 2021.
Predictions For The California Rental Market Amid Rising Interest Rates
Given the slow but steady recovery of the economy, paired with labor shortages and the end of eviction moratoriums, experts agree that property prices will continue to rise, and therefore rental prices will too. Experts also predict that the demand will continue to increase for rental properties in California and that the need for rentals will continue long term. Many renters will go into the rental search with the idea that renting will be a short-term solution, but as interest rates rise and buying a home becomes harder, they are renters for longer than anticipated. This is more good news for investors.
The Bottom Line
it’s still a good time to invest in property. And as renters are beginning to expect more from their rental properties and their landlords, property management becomes even more important to investment success. If you’re considering investing in property in Temecula, Murrieta, or the surrounding areas, consider working with a high-level property management company that knows the area and the industry.