Are lower interest rates a trap for property buyers?

trap
I often read that now is a great time to buy property because interest rates are so low. But are low interest rates really such a good thing for buyers?

There’s no doubt that lower interest rates are good for existing borrowers with variable rate mortgages (more than 98% of mortgages in Spain are variable rate). With Eurozone base rates at 1% and Euribor – the interest rate normally used to calculate mortgage payments in Spain – down almost 80% in a year to a record low of 1.261%, their monthly mortgage repayments are falling significantly, leaving them better off.

But what about new buyers? Are today’s freakishly low base rates, and hence lower mortgage repayments, a good thing for them. I have my doubts.

Just an excuse for more debt?

For a start, lower interest rates mean that people can afford more debt, and that drives up property prices. That may be good for existing property owners, but not people who want to buy. It’s a collective game, so when new buyers borrow more, they all end up having to pay more for property they would otherwise have bought cheaper. The only difference is they are saddled with more debt. What new buyers really need are lower property prices, not lower interest rates.

What comes down must go up

Moreover, interest rates may be low right now, but they won’t always be. Base rates will have to go up when the economy recovers, to stop the inflation genie getting out of the bottle, a fear that keeps the Germans awake at night (the ECB will do what’s good for Germany, not for Spain). The Australian Central Bank has just raised interest rates, the first OECD country to do so since the financial crisis. When interest rates go up, which they will, people who have borrowed too much to buy over-priced property will be in a pickle, just like last time.

So, lower interest rates are not necessarily a blessing for property buyers. They keep prices higher than they would otherwise be, and buyers run the risk of being lured into a debt trap. Anyone planning to buy property with a mortgage today better make sure they can still afford base rates are at 5% or more, not the 1% today.

Comments

comments

Leave a Reply