Inflation, Interest Rates and the Property Market
As we enter the final quarter of 2022, the property market moves into the next rising interest rate cycle as worldwide economies attempt to control rising inflation. On a simple level Interest rates impact the amount of money circulating in the economy, which in turn has a direct impact on inflation.
In an ideal world a couple of interest hikes over the next few months should start to get inflation under control and allow interest rates return to a more normal levels, when compared to the exceptionally low rates experienced over the past 5 years. These very low interest rates had made the Irish Investment market very attractive to both national and international investors.
Increasing Interest rates will impact the Property market and Businesses in numerous ways, including limiting availability and increasing cost of capital. Reduced affordability and more aggressive stress testing by lenders reduces end user demand. Increasing cost of finance has a knock on impact on the general property market including Investment property and the Development land market.
Notwithstanding the above, the Irish Property market continues to perform well with the Industrial/Logistics market the star performer on the back of a limited supply, together with some very strong prime Office rents being achieved. The impressive 60 Dawson St, Dublin 2 (pictured above), recent 90,000 sq.ft. letting to the US software company ServiceNow (rep by Colliers) is a good example of continued demand and rental growth in Dublin’s Grade A Offices (Landlord Agents JLL/Knight Frank).
Also last weeks report by React News of Spanish Investor interest in the €550 million Fibonacci Square, Meta Complex in Dublin 4 at initial yield in the region of 4% is a further vote of long term investor confidence in the Irish Investment market.
On the other side however, some developers are reporting diminishing appetite for site acquisitions while some Agents are experiencing reduced activity levels compared to the first half of the year in certain sectors of the market.
Combining this uncertainty with an Energy crisis and war in Ukraine, one can expect to see a more definite shift in general market sentiment. Neither the Financial or Property markets like uncertainty and both are looking for clarity in terms of inflation and scale of interest rate increases.
The Chief Economist of the European Central Bank, Mr Philip Lane is forecasting more interest rate increases and these are expected to continue into the early part of 2023 before being brought back to “a more normal level”. Hopefully Mr Lane is right and this current rising interest rate cycle will be short lived with more normal levels resuming in early 2023.
The markets will watch closely as to how things evolve over the next 6 months, hoping for more clarity and stability. The deteriorating situation in the UK has added further fuel to the fire, with talk of contagion, more aggressive interest rates hikes and further pressure on sterling which can only prolong inflationary pressures across the water.
Property is traditionally a longer term investment and many believe that Ireland is well positioned to ride this period of uncertainty and even benefit from the UK misfortunes in the medium term. In the short term however, it would be foolish not to expect reduced activity levels and a downward trend in pricing over the coming months.
Interesting times ahead and we should have a much clearer picture on market movements come first half of 2023.
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