Effects of Rising Interest Rates on the Real Estate Market

After a steep drop during the pandemic, the Filipino real estate market is only now starting to show signs of life. The sector is expected to recover after a year of decline, according to analysts. This is due to improved consumer sentiment and a decrease in the number of reported pandemic cases. In spite of any difficulties, the outlook has not changed.

We can remember that the BSP has been more hawkish this year in an effort to combat multi-year high inflation, which has led to an increase in the benchmark interest rate for borrowing costs in several local and global locators and other central banks loan categories, including the average bank mortgage rates.

To counteract the rising cost of living, the Bangko Sentral ng Philippines increased the policy rate by 225 basis points between May 2022 and September 2022, bringing it to 4.25%. This was the fifth rise in the policy rate that year.

How do Rising Interest Rates Impact the Philippine Property Market Value

There are a variety of approaches in which interest rates affect the households forming demand. The cost of borrowing money to purchase a property is a major factor in influencing the market value of the real estate. Real estate values are more responsive to changes in interest rates, with low rates increasing demand and high rates decreasing them.

What is an Interest Rate?

Borrowers and lenders negotiate an interest rate, which is the cost of borrowing money represented as a percentage of the loan's principal. The interest on a loan is expressed as a percentage per year or annual interest rate.

The money you earn through a savings account or Certificate of Deposit (CD) at a bank or credit union is subject to an interest rate, too. The yearly interest rate on these deposits is sometimes referred to as the annual percentage yield (APY).

For us to understand better the interest and mortgage rates and their impact on mid-market housing segments, here are several types of interest rates that you need to be familiarized with:

Compound interest rates

Some lenders insist on charging borrowers compound interest, which results in a higher total interest payment. Interest on interest, or compound interest, is added to both the initial principle and any existing interest from prior periods.

At the conclusion of the first year, the bank will presume the borrower owes the principal plus interest. The bank also estimates that the borrower will repay the total of the original loan balance, the interest accrued on that balance, and the interest on the interest, all by the end of the second year.

Nominal interest rates

A loan or investment's nominal interest rate is the publicly disclosed interest rate used to determine interest charges and payments. This is the rate at which a savings account accrues interest.

What is the impact of increased interest rates on the mid-market housing segment?

There are various predictions for the 2023 housing market. But one thing is for sure-- all parties involved in the real estate market, including buyers, sellers, investors, and landlords feel the effects of a rise in interest rates on the sector as a whole. How they are impacted is as follows:

A. Sellers

Although both sellers and buyers are affected by changes in interest and mortgage rates, each group is impacted in a unique manner, especially in terms of secondary market. You may set the asking price at anything you choose, even a million pesos if you want to sell your affordable house and lot. But, because of exorbitant interest rates, the maximum amount that any potential buyer could borrow to purchase your house would be Php 950, 000.

Your profit margin will improve no matter what, but if mortgage rates rise by only one percentage point, your house might lose as much as Php 50, 000 in value. So, your ability to assess the market will forever be the deciding factor in how much money you make. If borrowing rates are high, it's usually not a good idea to sell your property.

B. Buyers

In the real estate market, rising interest rates make it more challenging to purchase a home or since higher mortgage rates also reduce home affordability. As was previously said, a 1% rise may cut a consumer's buying power by 13%.

But, professional management services firm believe that borrowers may enjoy predictable monthly housing costs for 15 to 30 years with a fixed-rate mortgage. Meanwhile, investors may gain from a more supportive government that helps people get an affordable house and lot for sale.

Community Mortgage Program

As of January 2021, the Community Mortgage Program (CMP) in the Philippines is back up and running thanks to the efforts of the government. The goal of the Department of Human Settlements and Urban Development, which oversees the CMP, is to help communities with low incomes acquire and develop house and lot in the Philippines using the community ownership model.

If you're looking for an affordable property with a stable monthly housing expense, Lumina Homes is one of the top leading segments of affordable housing providers in the country. With over 50 project sites nationwide built in strategic locations close to best places to go during types of holidays in the Philippines, this is one of the great investments you can have for your family and your future.

C. Investors

When interest rates climb, investors often gain. Due to rising mortgage rates, more individuals will want to rent instead of buying a home since only a few people in the population are in a position to purchase a home with a mortgage loan.

Investors may bypass the mortgage application and underwriting processes, together with the associated charges and fees, if they do not require a loan to finance the purchase of a home. It may be preferable to acquire real estate during a period of rising interest rates due to the market conditions of higher availability and decreasing demand.

In addition, when long-term rental prices climb, investors may turn their homes into short-term rentals. They might earn a lot of money if they are able to successfully target the proper market like somewhere close to best place to go in Christmas Philippines or a few blocks away from restaurants and stores that sell famous Filipino snacks and Philippines best food.

Everyone can better react to rate hikes over time, from prospective homeowners seeking a mortgage to corporate executives debating whether to fund a major project with financing.

Knowing the bright side of interest rates rise can give you much of an edge in the industry of real estate investments.

Take advantage of these raise interest rates and put your money to good use by investing in an affordable yet decent housing market like Lumina Homes. Convert your properties into rental property and enjoy the benefits of financial freedom with your passive income.

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