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Enoch Root · 06-13-2021, 10:56 AM

I believe that a word of caution is in order with rental property investments...

For most of us, interest rates have been declining for our entire lives. Unless you were around in the 70s to see inflation and rising interest rates, most people really don't know what it was like.

When interest rates go down, the monthly carrying cost of a home goes down, meaning people can afford a bigger home. And housing prices rise. Housing prices have outpaced inflation and real value for decades - for the entire period that interest rates have been declining. And for the entire adult lives of anyone under 60 or so.

Those two things (rising prices, and lower interest rates) have created an environment whereby investing in real estate has provided excellent returns - higher returns than passive investments should have offered, relative to other investments. When an investment vehicle does well, people get over-confident and assume it will continue.

However, we are now in a situation where interest rates simply can't go any lower, and are quite likely to start rising - perhaps a fair amount. When interest rates go up, the monthly cost of a property goes up. Then people can't afford the same home. That puts downward pressure on prices.

IMO, the great reckoning is coming in the housing market. As I said, most people have never seen rising interest rates. Look at markets like Toronto and Vancouver. People making average wages are trying to buy their way into homes that cost $1 - $2M dollars. But what happens when interest rates go from 2% to, say 4%? How many people can no longer afford their home?

In 1981, mtge rates peeked at something like 19%. Many people, whose mtge came due for renewal, simply walked away from their homes because there was no way they could afford the mtge.

I am not suggesting for one second that we are looking at a 1981 situation any time soon. I am simply saying that rising interest rates are a huge issue with the price of homes being so out of whack. And most people have no idea what is coming.

And that is why I am very leery of investing in property right now. I think the great free ride that people have been getting for so long, is coming to an end. And investing in properties is going to be a MUCH tougher game going forward.

Just my opinion.

06-13-2021, 10:56 AM	#7
Enoch Root Franchise Player Join Date: May 2012 Exp:	I believe that a word of caution is in order with rental property investments... For most of us, interest rates have been declining for our entire lives. Unless you were around in the 70s to see inflation and rising interest rates, most people really don't know what it was like. When interest rates go down, the monthly carrying cost of a home goes down, meaning people can afford a bigger home. And housing prices rise. Housing prices have outpaced inflation and real value for decades - for the entire period that interest rates have been declining. And for the entire adult lives of anyone under 60 or so. Those two things (rising prices, and lower interest rates) have created an environment whereby investing in real estate has provided excellent returns - higher returns than passive investments should have offered, relative to other investments. When an investment vehicle does well, people get over-confident and assume it will continue. However, we are now in a situation where interest rates simply can't go any lower, and are quite likely to start rising - perhaps a fair amount. When interest rates go up, the monthly cost of a property goes up. Then people can't afford the same home. That puts downward pressure on prices. IMO, the great reckoning is coming in the housing market. As I said, most people have never seen rising interest rates. Look at markets like Toronto and Vancouver. People making average wages are trying to buy their way into homes that cost $1 - $2M dollars. But what happens when interest rates go from 2% to, say 4%? How many people can no longer afford their home? In 1981, mtge rates peeked at something like 19%. Many people, whose mtge came due for renewal, simply walked away from their homes because there was no way they could afford the mtge. I am not suggesting for one second that we are looking at a 1981 situation any time soon. I am simply saying that rising interest rates are a huge issue with the price of homes being so out of whack. And most people have no idea what is coming. And that is why I am very leery of investing in property right now. I think the great free ride that people have been getting for so long, is coming to an end. And investing in properties is going to be a MUCH tougher game going forward. Just my opinion.