Mapped: What does the Fed’s US rate hike mean for property?

The US Federal Reserve has decided to raise interest rates by 0.25 per cent. The move, which was announced last night following the Fed’s first policy meeting since the election of Donald Trump, marks the first time that rates have been raised this year and only the second time since the global financial crisis.

The benchmark rate is being increased from 0.25 per cent to 0.5 per cent, the Fed announced. The unanimous decision from the Reserve’s officials is an overwhelming vote of confidence in the US economy, with experts expecting inflation to climb in the next year. Indeed, while Trump’s election last month surprised many, his talk of increased spending is fuelling positive sentiment in the US economy.

“Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year. Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft,” said the Federal Reserve in a statement.

As a result, the Federal Reserve has a target rate of 0.5 per cent to 0.75 per cent, with officials hinting at further rate rises in 2017.

“The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further,” added the Fed. “Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.”

What does the rate hike mean for property?

In the US, the main area of impact will be the mortgage sector. The federal rate applies not to consumers, but to banks, who typically lend money to each other to help keep their reserve balances afloat. As costs for banks go up, though, they pass that on to consumers, which means that mortgage rates indirectly increase.

Research from Zillow considers what would happen if lenders were to pass on the 0.25 per cent hike through mortgage rates. According to Zillow, an average homeowner would see their mortgage payment rise by $22 each month. Borrowers in San Jose would see payments go up by the highest amount of $112 a month, while those in San Francisco would see theirs jump $95 a dollar. The lowest increase would be in Pittsburgh and Cleveland, with mortgage payments up $15 a month.

We have mapped that data to make it easier to find the relevant market for you, as well as to see the variation in house prices and rates across the country:

However, rate hikes do not work quite as directly, or as quickly, as that. Fixed-rate mortgages are the most popular among home buyers, with consumers racing to secure the lowest possible rate and lock them in for as long as possible. Because the 0.25 per cent raise from the federal reserve was expected, many lenders have already bumped up their costs: according to Freddie Mac, mortgage rates last week hit a 2016 high with the 30-year fixed figure hitting 4.13 per cent.

Despite the relatively slow-paced nature of the mortgage market, though – particularly compared to, for example, your credit card interest rate – mortgage rates have an impact on the wider market: as rates go up, people are slightly less likely to buy a home or move, as well as refinance. As a result, housing sales could be impacted and slow down, which would also weigh upon house price growth.

Landlords, too, will have to pay more for purchasing and renovating properties, which will mean that costs could potentially be passed onto tenants in the long term.

What does the US rate hike mean for overseas property?

There is some speculation that the USA’s decision to raise interest rates could inspire a similar move in the UK, as the British economy sees inflation rise faster than expected. However, the Bank of England has only just lowered its base rate to support the economy in the wake of the country’s Brexit vote. While the UK may be the next country to see its central bank hike rates, that may not necessarily be for some time.

More likely to impact overseas property trends is the effect that the federal reserve’s decision has upon the currency market. Indeed, the US dollar has now risen to a 14-year high against a basket of other major currencies, a sign of how much confidence has been buoyed by the fed’s talk of several interest rate increases in 2017. This may impact international buyers seeking property in the USA, whose transactions will become slightly more expensive, but is also likely to encourage the reported rises in investment in markets such as France, Italy and the UK, as US investors take advantage of their spending power.

Photo: Epicharmus