This week, the US Federal Reserve decided to raise interest rates for the first time in seven years. What does the hike to 0.5 per cent mean for property in America and overseas?
Despite being expected, the raise sent the dollar on a “rollercoaster ride”, explains Nikolas Xenofontos, Director of Risk Management at easy-forex.
The EURUSD rose initially to 1.0887, then after Chairwoman Yellen’s dovish comments that this hike was to avoid more aggressive ones, it retraced to 1.1010. However the Fed’s ‘dot plot’ is for 4 hikes in 2016 and the dollar responded accordingly regaining ground to 1.0830.
The currency is a key factor in both US investors buying property abroad and investors from other countries investing in US real estate.
CBRE’s Head of EMEA and UK Research, Neil Blake, hailed the decision as a “watershed in the global economy”, noting the implications for trade and other economies.
“As well as bringing challenges for still indebted western companies and households, emerging market economies already suffering from the slowdown in China and commodity price weakness, will now face a triple whammy of falling export prices, a stronger dollar and the prospect of further US rate rises in the longer term,” Blake comments.
“Any instability in emerging economies will have direct trade implications for those European countries exposed to these markets. It also carries with it an indirect financial risk of defaulting economies, which could cause problems for western financial institutions, and with it, repercussions for property in western financial centres.”
However, interest rates are rising because policy makers believe a sustainable recovery has set in, not just in the USA but in the rest of the western world too.
“This translates into rental growth in many European property markets, which will actually boost investor confidence,” Blake adds.
“As long as interest rate rises remain gradual, any impact on property pricing will be muted, especially if rents are rising, and any ‘boomerang effect’ from emerging economies should be transitory. The UK economy and property market should weather the storm.”