{"id":9608,"date":"2022-10-10T07:27:28","date_gmt":"2022-10-09T23:27:28","guid":{"rendered":"https:\/\/dollarsandsense.sg\/business\/?p=9608"},"modified":"2022-10-19T21:20:12","modified_gmt":"2022-10-19T13:20:12","slug":"real-estate-investing-in-a-less-certain-world","status":"publish","type":"post","link":"https:\/\/dollarsandsense.sg\/business\/real-estate-investing-in-a-less-certain-world\/","title":{"rendered":"Real Estate Investing In A Less Certain World"},"content":{"rendered":"\n

This article was contributed to us by RealVantage<\/a>. RealVantage is a leading property fintech firm in Southeast Asia that provides investors with access to co-invest in a diversified range of institutional-quality properties in a hassle-free way.<\/em><\/strong><\/p>\n\n\n\n

Just as the world has begun to recover from the effects of COVID-19, countries worldwide now have to grapple with an even more challenging scourge \u2013 soaring inflation.<\/p>\n\n\n\n

This time round, geopolitical factors have been the key culprits of high inflation<\/a>, as the Russia-Ukraine war<\/a> that broke out since February has disrupted energy, raw material and food supplies, sending prices of all things to stratospheric levels. And the impact of the supply chain disruption has also contributed significantly to rising prices.<\/p>\n\n\n\n

Rates rise as prices fly<\/h3>\n\n\n\n

Central banks around the world have been anxiously trying to snuff out the flames of inflation by tightening monetary policy throughout the year, for fear that they will become a raging inferno.<\/p>\n\n\n\n

Among the key real estate markets that we monitor, the Federal Reserve has already hiked interest rates five times so far this year, bringing the Fed funds target rate to a 14-year high<\/a> range of 3.00% to 3.25% in September \u2013 and it looks like more hikes are on the cards. In a similar fashion, the Bank of England has also raised interest rates seven times in a row since December last year to a 14-year high<\/a> of 2.25% in September. Meanwhile, the Reserve Bank of Australia has also hiked rates in September for a fifth month running to a seven-year high<\/a> of 2.35%.<\/p>\n\n\n\n

Rate hikes are a bitter medicine to swallow, especially when they could derail a brittle economic recovery that most nations are now in. Too much of this bitter prescription could possibly stunt business and economic growth, which is likely to have a domino effect on exports, investments, employment, and consumer spending, among others.<\/p>\n\n\n\n

It probably isn\u2019t surprising that this has stoked a frisson of market jitters, which have led stocks to whipsaw wildly and retreat since the start of the year. Bonds were not spared either. Credit spreads have jumped about 70%<\/a> over the past year, due to rising inflation, and that has pushed up borrowing costs for businesses in the U.S. Globally, bond markets have also fallen into a bear market<\/a>, as indicated by the Bloomberg Global Aggregate Total Return Index of government and investment-grade corporate bonds, which has declined more than 20% below its 2021 peak as at early September this year.<\/p>\n\n\n\n

Year-to-date Performance of Key Global Stock Markets<\/h3>\n\n\n\n
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Source: Google Finance, as at 22 September 2022<\/figcaption><\/figure>\n\n\n\n
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Economic growth to lose speed<\/h3>\n\n\n\n

Scroll through the online news pages and it is not hard to notice that \u201crecession\u201d is one of the most oft-mentioned words in the last few months.<\/p>\n\n\n\n

With monetary policies tightening to temper inflation, many experts are forecasting an economic downturn that is likely to result in a global recession. The International Monetary Fund<\/a> (IMF), for one, expects that global GDP growth will fall to about 3.2% and 2.9% in 2022 and 2023, respectively. Echoing a somewhat similar view, the World Bank<\/a> (WB) is expecting a global recession in 2023, and it predicts global GDP growth to slow to 2.8% and 2.3% in 2022 and 2023, respectively.<\/p>\n\n\n\n

Higher food and energy prices (Index, Jan 2019 = 100)<\/h3>\n\n\n\n
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Source: International Monetary Fund, World Economic Outlook Update<\/em>, July 2022
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Monthly Consumer Price Index<\/h3>\n\n\n\n
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Source: Word Bank, Is a Global Recession Imminent?<\/em>,September 2022

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These predictions are not unfounded, as massive rate hikes will almost certainly put a dent in business growth and investments, which is largely a corollary of a slowdown in consumer demand from potentially higher unemployment and lower incomes.<\/p>\n\n\n\n

Headwinds in real estate<\/h3>\n\n\n\n

Higher inflation has historically led to higher property prices, which should have been good news to real estate investors. But currently, prices are rising so fast and furiously that central banks around the world have had to start hiking interest rates hawkishly to tame inflation.<\/p>\n\n\n\n

The upshot of higher interest rates on real estate is obvious \u2013 a surge in the cost of borrowing in the form of higher property loan rates and mortgage rates, which will in turn slow down property demand and deflate asset prices.<\/p>\n\n\n\n

Residential property sales, for one, have been hit hard as the buyer-seller price gap has been widening. Home sales in the U.S. dropped for a seventh straight month<\/a> in August; U.K. house prices have started to fall and are expected to decrease 7%<\/a> in the next two years; while Australia\u2019s home prices are expected to decline an average of 6.5%<\/a> this year and a further 9.0% next year.<\/p>\n\n\n\n

Other real estate sectors would probably not be unscathed from the rising cost of borrowing too.<\/p>\n\n\n\n