The Philippines housing market is currently experiencing a state of recovery, starting strong in Q1 of 2024. After a significant downturn caused by the COVID-19 pandemic, property prices have started to stabilize, and there is a renewed interest in real estate and housing market investments.
We’re seeing an increased demand for real estate market products despite rising interest rates and home prices. This recovery is fueled by various factors, including:
a.) government initiatives
b.) economic growth, and
c.) improved real estate and housing market conditions
However, one of the most critical elements influencing the real estate market is the fluctuation of interest rates. Understanding how interest rates impact home-buying decisions is essential for potential buyers, real estate investors, and policymakers.
The Impact of Interest Rates on Real Estate Market and on Your Home Buying Decision
We’re coming into a period in the real estate market where we’re seeing significant movement in real estate investments and a heightened demand within the housing market.
While there are many factors that could affect home buying decisions, including home prices, rates of monthly mortgage payments, and gradually improving economic conditions, interest rates play a vital and perhaps have the most significant impact on the real estate market.
Interest Rates, Mortgage Rates and Payments
Interest rates play a crucial in determining mortgage rates, which has a direct impact on real estate prices and monthly mortgage payments.
With lower interest rates, monthly payment toward mortgage rates tend to be lower, resulting in lower monthly mortgage payments and generally lower home prices— allowing buyers to acquire expensive properties and real estate investments with heightened demand.
This makes home-buying more affordable for potential buyers and any real estate investor, increasing housing demand.
Conversely, higher interest rates lead to higher mortgage rates, higher monthly mortgage payments, and higher property prices, which can deter potential buyers and decrease demand.
Fixed-Rate vs. Adjustable-Rate Mortgages
Fixed Rates: Protecting borrowers from future hikes
There are two primary types of mortgages in the housing market: fixed-rate and adjustable-rate.
A fixed-rate mortgage offers a stable interest rate throughout the loan term, providing predictable monthly payments at a risk-free rate.
This can be advantageous in an environment where interest rates rise, as borrowers are protected from future rate hikes and heightened competition.
Adjustable-Rate Mortgage: Fluctuates based on real estate market conditions
On the other hand, an adjustable-rate mortgage (ARM) could have several interest rate changes throughout the term.
The interest rates in ARM can fluctuate based on real estate market conditions, including downward pressure on the broader economy, rising home prices, and other inflation expectations.
While ARMs may start with lower initial interest rates, they carry the risk of increased mortgage payments if, throughout the term, there are progressively higher interest rates.
Those who are more receptive to risks in the real estate market know that a risk premium can pay off handsomely.
Potential homebuyers must consider the current environment and their risk tolerance when choosing between these mortgage payments.
Property Prices and Interest Rates
Interest rates play influential roles in property prices as well. Lower interest rates tend to increase demand for housing, leading to higher property prices.
This is because cheaper borrowing costs will be allowing buyers and people looking for real estate investment opportunities to afford homes and property.
This creates heightened demand and even sharper heightened competition in the market.
Conversely, higher interest rates have an inverse relationship with property prices. It can put downward pressure on property prices and the greater real estate market.
As borrowing becomes more expensive, fewer people can afford to buy homes, leading to decreased demand.
This can result in a stagnation or decline in property values and home prices, impacting both homeowners and real estate investors.
Economic Conditions and Real Estate Investments
A tool for monetary policy to control inflation and stimulate economic growth
Interest rates are closely tied to broader economic conditions. Central banks, like the Bangko Sentral ng Pilipinas (BSP), use interest rate changes as a tool of monetary policy to control inflation and stimulate economic growth in a weakening economy.
They could also use interest rates to help guide inflation expectations.
Like several other assets, lower interest rates on real estate are typically implemented to encourage borrowing and investment, which can boost the housing market and overall economy.
However, during periods of rising interest rates, economic growth may slow down, leading to a weakening economy.
This can have a significant impact on the real estate market, as decreased consumer confidence and higher borrowing costs reduce the demand for properties and further decrease real estate prices.
Adjustments in monetary policy can and will impact interest rates and mortgage rates, so it’s good to keep an eye out.
Rental Prices and Commercial Real Estate
Interest rates also affect home prices and, by extension, rental prices and commercial real estate markets.
Higher interest rates can lead to higher mortgage payments for landlords, who may pass these costs onto tenants through increased rental prices.
This can impact housing affordability for renters and influence their decisions about whether to rent or buy.
In the commercial real estate sector, rising interest rates can increase the cost of financing for real estate investments, affecting capitalization rates and overall investment returns.
For instance, office space rental prices may rise without increased demand for such spaces.
Commercial real estate investors need to carefully assess the interest rate environment and potential risks when making investment decisions.
Making Informed Decisions in a Dynamic Real Estate Market
Understanding the relationship between interest rates and the real estate market is crucial for making informed decisions, particularly if you’re planning to make real estate investments soon.
Here are some key considerations and strategies for potential homebuyers and real estate investors:
Assessing the Current Interest Rate Environment
Potential buyers should keep an eye on current interest rates and forecasts for future changes, particularly if and when rates rise.
Any changes in monetary policy by the BSP or any consequential federal reserve changes should be on the radar for a real estate investor as these can make a significant impact on real estate prices, mortgage rates, and real estate interest rates.
By staying informed, real estate buyers can time their purchases to take advantage of lower interest rates and secure more favorable mortgage terms.
Considering Property Prices and Investment Opportunities
Potential homebuyers and real estate investors should consider how interest rates influence property prices.
Increased demand may drive up property values in a low-interest-rate environments
In a low-interest-rate environment, increased demand may drive up property values, creating opportunities for appreciation.
However, in a high-interest-rate environment, buyers may find more affordable properties but face higher interest rates on real estate borrowing costs.
Assessment if rental market is essential
Additionally for those considering real estate investments, assessing the rental market is essential.
Higher interest rates can lead to increased rental prices, which may benefit landlords but impact tenants’ affordability.
Understand local market conditions and rental trends
Understanding local market conditions and rental trends can help investors make strategic decisions.
Monitoring Economic Indicators
Keeping track of economic indicators, such as GDP growth, employment rates, and inflation, can provide valuable insights into the broader economy and its impact on the real estate market.
Economic growth and stability are often associated with favorable real estate market conditions, while economic downturns can pose challenges.
Make the Best Real Estate Investments With Camella
The impact of interest rates can be far-reaching in the real estate market. Interest rates have a profound impact on the real estate market, influencing everything from mortgage rates and property prices to rental markets and economic conditions.
For many home buyers, short-term interest rates may be the priority, there are many factors at play that could affect interest rates and housing demand.
For Filipinos navigating the housing market recovery, understanding these dynamics is crucial for making informed home-buying and real estate investment decisions.
Fortunately, Camella is with you every step of the way. It’s our decades-long mission to help the Filipinos get more for their money’s worth.
Real estate investments in Camella ensure that you’re getting equitable interest rates in the Philippines’ growing housing market.
Housing demand in a master-planned Camella project ensures that property prices stay stable, and with lower monthly mortgage payments, interest rates are manageable.
By staying informed about the current interest rate environment, choosing the right mortgage, considering property prices, evaluating real estate markets and housing, and monitoring economic indicators, potential homebuyers and real estate investors can navigate the complexities of the real estate market with confidence.
As the Philippine housing market continues to recover, these insights will be invaluable in making sound financial decisions that support long-term success in real estate investing.
Check out our House and Lot for Sale Properties
Discover our house and lot for sale properties in the Philippines
