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Longer term interest rates

16th October 2007 | back to article listings BACK    print this article PRINT

Following my previous post regarding interest rates and rental income increases I have a question about longer-term interest rate views.

Longer-term interest rates look stable judging by long-term swap rates (long term interest rate financial derivatives that let you lock in a long term base rate against other investors willing to offer you stability) - the implication is that experts believe interest rates in the long term to be similar to the current levels or thereabouts. Swap rates aren't implying 10% or 11% as the old commentator has suggested but in fact something in the 5% zone or so over the next 10 to 15 years.

Alan Greenspan presided over a long period of mild inflation and has suggested we may be in for higher rates in the future but I feel it was the deflationary effect imported from China that gave rise to the long period of low interest rates and low inflation he presided over rather than specifically the actions of Greenspan or indeed (Mervyn) King (Canute). There will be cheap labour in India and China for a long time to come and their above average wage growth will have a long time over which to feed into inflation overall. In a similar way to oil prices not having a significant inflationary effect in reality I suspect competing Third World economies will equally prevent a feed in inflationary effects into the western world fast enough to have a significant effect.

There are plenty of property investments around that would stand a 10 or 15 year fixed rate even at current levels and be cash positive for most if not all of the period and for the cautious amongst us that may well be an answer for further purchases. An example of these would be these two properties : investors.assetz.co.uk/property-detail.htm?propID=2760 and investors.assetz.co.uk/property-detail.htm?propID=2755 - both student properties as it happens that cash positive pretty much straight away.

In addition 7% compounded rental growth for the next 10 years (which is properly not far off what we will see in the rental growth phase of this market) would double rental income in absolute terms and that will certainly leave investors in a good position to deal with higher interest rates - high inflation and an uncertain property market will lead to rental growth and the effect should balance out quite nicely but no doubt with certain timing difficulties along the way.

Stuart Law

This news story has come from the property investment blog by Stuart Law, CEO Assetz plc.

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