Real Estate Agent · Los Angeles, CA · Member since 2019 · 302 posts · 163 votes
I think that the government raising rates to curb inflation is dangerous. This current government is pushing equality and diversity, but I fear that higher rates aren’t going to push prices down, but only make it so the wealthy can purchase real estate and make the divide greater between the rich and the poor. For example in Los Angeles, prices are not going to drop in the near future, because our demand greatly outweighs our supply. There a zero new homes being built, because there is no land to develop. All the new construction appears to be luxury high rise condos. The other new construction appears to be low income fourplexes, that are being torn down for million dollar townhomes. Affordability is decreasing at an alarming rate.
Therefore, low to middle income renters will keep on renting and high income renters will be the only ones that can purchase a new house or condo and get out of the rat race.
I have seen this personally with friends who make $150k a year and rent, thinking that the market is going to crash. They can’t save fast enough to buy in this expensive city that keeps increasing in value. They will have to continue to rent, or buy an hour away from work to be able to afford a house. I think that this topic needs to be discussed further and looked into in more depth.
We are in a period of transition that makes for a strange situation. Looking beyond the next few weeks and months, I must disagree with your premise.
Who benefits most from artificially low rates? The wealthy do. They own assets. The value of all their assets goes up when rates are artificially low.
Who gets hurt the most by artificially low rates? People that have only cash. They get zero return on their monies. This is particularly true when inflation is higher than interest rates, as it is today. The value of that paycheck, the value of that pension, the value of the cash sitting in the savings account are all going down in real terms.
Thanks for the thoughtful reply. My issue is that higher rates, tied in with higher prices will price out the lower to medium income earner. How will these people buy homes unless prices drop, which I do not see happening in cities like LA. There’s so much demand and so little supply, that it will take forever for prices to drop out here if ever.
Therefore renters will continue to rent with high rent prices and people who own, can pull money out from their homes and investments and buy more.
I believe you are talking about two different points in your original post. Raising interest rates is supposed to cool demand (cost of owning becomes more expensive), and cooling demand will tend to reduce prices over the longer term (less people can afford the prices so less interest and reduced prices required to entice buyers back to the market). This is a general economic theory anyway and whether it works or not is another topic altogether. Having said this i think we can see that the intended cooling effect of raised rates is starting to take effect in the market with DOM going up and price reductions being seen on listed home more often (general terms i know).
The second part is the scarcity of land and/or properties in a specific location. Some markets such as Manhattan, Rio (Brazil) and Cape Town (South Africa), to name a few, just dont have any more land that can be developed making the existing properties more valuable and desirable due to their location. This will always be the case in Real Estate (location - location - location) and there is nothing much that can be done about it. In 20 years from now people wont believe that you could purchase a 2 bedroom condo for $1.5 Mil (guessing the price here) when they are worth 12 Mil at that future time.
These are just my thoughts and I am by no means an economist so feel free to comment.