What Makes Interest Rates Rise?
Published by Jacob Field on 19 April 2022What makes interest rates rise?
Inflation is projected to be 7 to 10% this year alone.
The reserve bank of Australia is still saying after 2022.
If it happens this year, what is causing it?
Over the last 100 – 120 or so years in Australia, there has been a very strong positive correlation between inflation and property price growth.
When inflation is occuring, what are the safe havens for high net worth individuals to park their money?
They’re not going to leave it in cash in the bank.
Investors and smart sophisticated individuals have to get a return.
They put money into property.
It is a safe haven asset base.
All the times over the last 120 or so years in Australia, inflation has increased, then interest rates have increased.
What happens too? Property prices have also increased in those same periods.
It’s an interesting fact.
If you have $1 million dollars on a 3% interest or 4% or 5% interest rate on a loan (interest to hold that debt)
And you have 7% inflation over the next 12 months, well the money that you have from that bank is devaluing more than the interest you’re paying.
So effectively, the purchasing power of that money is decreasing more than the interest you’re paying on it.
When what you’re paying for the debt minus inflation is a negative number, you’re actually better off owning debt through that period because you are getting ahead through real interest rates.
The larger than the real interest rate or the larger the negative real interest rate is, the better you are to park your money in debt related assets or debt driven assets when you can buy scarce safe haven assets with that debt.
Then you sometimes get a double whammy, the intrinsic value of properties over the next 12 months potentially is increasing.
You’ve got people piling into it as an asset class, therefore the value of that is increasing.
The debt that you used to buy that asset is devaluing, you have a double whammy, you’re getting ahead.
That’s why people who know this, pile into property and generally you see property prices increasing alongside increases in inflation and therefore interest rates.
Really interesting phenomenon, in summary, it’s where smart money moves.