After months of widespread speculation about the US interest rate, the Federal Reserve finally introduced a rate hike of 25 basis points in December, pushing interest rate to between 0.25% and 0.50% as 2015 draws to a close. This is the first interest rate hike since June 2006, ending almost a decade of monetary easing. The rate hike will not only affects Americans, but will result in a chain reaction in the international market.
The US economy which has been simmering in moderate growth will likely continue on its path despite the normalization of interest rates. The Federal Open Market Committee believes that the current market condition permits only gradual rate hikes, but expect the Feds to raise lets 3 or 4 times in 2016 and interest rate might likely reach 1.4 percent by end of 2016.
Since 2009, the global real estate market has benefited from the low interest rates and the availability of cheap money. Taken on its own, one of the most obvious implications is the erosion of buying interest as it becomes more expensive to finance the mortgage.
However, the interest rate hike came on the back of gradual recovery of the US economy and can be seen as a way to better balance demand and supply of properties. According to figures by S&P/Case-Shiller, prices of properties in some 20 American cities rose by 5.1 % to the year ending August.
Market Re-Pricing to Come
The higher cost of purchase and healthy market sentiments are expected to push up overall real estate prices, particularly after President Obama signed a bill recently to relax tax controls tor foreign buyers which will likely encourage more overseas investor into the US.
Nobel laureate Robert Schiller believes that the end of zero interest rate will certainly lead to re-pricing of asset prices and bring trickle-down effect to Asian economy. Looking at the US interest rate movement over the past two decades and it is interesting to note that the hikes coincide with financial crisis in emerging markets.
The 1994-1995 and 1999-2000 hikes preceded the financial crisis in Mexico and Russia respectively, while the 2004- 2006 hikes were followed by the Asian financial crisis.
The interest rate rise is also expected to put a damper on the global market recovery as economies around the world scramble to deal with the end of easy credit.
Emerging Markets Risks
Many economies in Asia are currently facing some risk bubble in its asset markets which can be attributed to the hot money flowing into Asia as a result of US quantitative easing over the years.
Although stock markets around the world rallied following the rate hike announcement, experts believe the market will weaken going forward as the holiday season draws to a close and the market readjusts to the new rates.
Emerging economies in particular, are expected to take a hit from the rate hike and stronger dollar.
As the world’s second largest economy, China has had to grapple with its fair share of economic slowdowns in 2015. However, the Chinese market is largely driven by domestic buyers and the US rate hike is likely to have little impact although there are still concerns about potential capital outflow from China.
On the other hand, China’s investment into the US market is expected to continue as before as the strengthen dollar against the weakening yuan has made US real estate to become more attractive as a store of value in such an economic backdrop.
Hong Kong and Singapore which are highly dependent on the financials sectors are facing increased risk of capital outflow which may finally bring a halt to real estate price boom of the past years. However having experienced the devastating impact of the 1998 crisis, the governments are expected to take steps to prevent a repeat.
On the other hand, the Singapore government is expected to continue with various cooling measures as its works towards the goal of cooling down the heated market.
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