Lowest interest rates in 500 years ... and what happens next?

TangoWhiskey

Frequent Forum Member
Registered
There is a lot of press now about how we have the lowest interest rates globally in 500 years. 10 trillion dollars of central bank debt now has negative interest rates ON TEN YEAR DURATION. People are PAYING to give their money to central banks to get the same amount or less back in 3-4-5-10 years time.
5 yr mortgage rates are now 2.5 % for solid borrowers.
Rreal estate has had an unbelievable bull run of 20 years and more as the rates have dropped and prices risen as people could afford larger and larger mortgages.
What do people think will happen next as the rates start to drift up? My forecast is for a stagnation of price for 7+ years as rates slowly rise, real estate slowly gets less affordable, and inflation starts to chip away at the real value.
What other outcomes could we see here and why?
 

Thomas Beyer

Senior Forum Member
REIN Member
Rates will NOT rise. Who told you it will, and why ?

Below are Canada's 2, 5 and ten year bond rates. Sub 1.2% over ten years shows me they will stay very low otherwise they'd be higher.

In fact they may go lower. A mortgage in Germany or Switzerland starts with a 1 these days.ImageUploadedBymyREINspace1465704249.927331.jpg

Negative yield curve out to ten years in EU and 20 in Switzerland. Canada higher but lower than USA.
ImageUploadedBymyREINspace1465704385.884845.jpg

Borrow to the point of having sufficient cash flow and reserves. Borrowing at 2.5-3% and investing at 4-7 makes total sense to me. Money is on sale. Take advantage of it.
 
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Thomas Beyer

Senior Forum Member
REIN Member
Indeed buying an asset in all-cash is lower risk. Risk and return are related. More on this here: http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/

The risk of mortgages are two fold:
a) you cannot serve the debt as your cash flow is too tight. This is also referred to as "being over-levered" or "having too little reserves".

b) you cannot re-finance when the mortgage is due. This happens in a falling market, like Alberta the last 2 years. Over a five year you pay your mortgage down 15% so that risk is low unless the market is falling or your cash-flow (see a).

As such keep the risks in mind. However, as rates will likely not rise, or not substantially or if, extremely gradually, it makes sense to borrow and invest in an asset that yields at least 2-3% more than the interest rate you are paying.
 

Rickson9

Senior Forum Member
Registered
Also don't make predictions. It didn't work in the US and it didn't work in Alberta. Keep on keeping on!
 

Thomas Beyer

Senior Forum Member
REIN Member
Also don't make predictions. It didn't work in the US and it didn't work in Alberta. Keep on keeping on!
Only a fool walks through life with no assumptions, plans or predictions about the future.

You cannot raise a family, take a job or make any investment without a set of assumptions ? What are yours ?

And, sure, keep investing all cash, like the other, meh, 1% of real estate investors. Ever wondered what the 99% know that you don't ?
 
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