How interest Rates affect Real Estate business?

Can interest Rates affect Real Estate business?

The interest rates as controlled by the Reserve Bank of India have a substantial effect on the real estate business. Lower the interest rate, higher is the investment made in real estate sector and vice versa. The effect on the real estate investment is observed by combination of factors such as interest of bank loans, lower prices and job market scenario.

You must have seen many people keeping a track of the bank interest rates. Similarly, banks always inform people about their interest rates and its changes through newspaper, TV or different advertising mediums. If you are taking initiative in the real estate investment sector, then you must analyze the impact of changing interest rates on the real estate. You must keep a track of the interest on loans and fixed deposits provided by the banks. This will help you in decision making activity such as

• which property should be bought,
• whether property should be purchased or not,
• how should you arrange for financing the property or
• How will the interest rate have an impact in future.

Let us understand this impact of interest rates on real estate investment by studying the inter-related factors.

Fall in interest rate – Effect on capital

When the interest rates are lowered, then new businesses acquire loans easily for starting their business operations. It is beneficial for the existing businesses too. The existing business can obtain loans and expand their activities on a large scale. In this way, the capital becomes relatively cheaper.

Fall in interest rate – Cheap capital – Effect on job market

As the companies expand or start their operations, they need a qualified taskforce. This creates employment opportunities. Subsequently, people tend to shift jobs or unemployed secure good jobs in companies.

Employment – Effect on real estate investment

The people are secured with good jobs and sufficient income levels. Moroever, the interest on bank and home loans continue to be lower. Hence, people go for investing in real estate business. As there are number of properties growing in all types of areas, people prefer to buy houses and commercial property. Even middle-class people prefer to invest in real estate sector. Thus, fall in interest rate calls for increase in demand for housing facilities. People get loans easily with a relatively lower rate of interest. It is observed that prices of the property do not form substantial component in real estate investing. Most of the times, it is the interest rate which enjoys determination of success in real estate investing.

It is to be noted that lower interest rates do not provide assistance to the people who do not have sufficient fund to buy properties. These people are not satisfied with the lower interest rates as their savings and fixed deposit accounts are affected.

Thus, it can be observed by this inter-connection of factors that good investment portfolios can be built with lower interest rates. A person who is new in this field must be attentive before investing. He should not blindly purchase property when the interest rates are lowered. Careful analysis of the existing market, property and own goals is always important. He should also be aware about the consultancy firms.