There are many ways to keep track of what has been going on around the world over the past few years. Simply reading the news will tell you most of what you need to know. But sometimes it is worthwhile to take a look at the indirect implications of those headlines.
For those who have recognised the value in having a diversified asset allocation and invested in property in the United States, the movements of the property market are very telling. The property market in the US was consistently on the up until 2020, without too many major interruptions. Then the pandemic happened.
The impact of the pandemic on the property market has been complex. At the start of the pandemic, with strict lockdowns in place, demand for property dropped and property values plummeted. But this did not last long. After a few months, property values began to shoot up. This was due to a combination of record low mortgage rates and a lack of supply caused by the pandemic.
Property prices are still rising, even with mortgage rates having increased in 2022. But Russia’s invasion of Ukraine is now having a peculiar impact on the US property market. Mortgage rates have dropped for the first time in months.
Why should that be the case? Here are some of the ways the Russia-Ukraine war has impacted the US economy and, in turn, mortgage rates.
The Risk of Stagflation
Sanctions are never an easy decision for a government. They are used as measures to pressure a country into stepping back from a dangerous situation. However, they can seem punitive, especially to residents of that country. Regular Russians do not necessarily support the invasion, but they will be hit hard by sanctions. The idea is that this puts their government in a tough position, even if civilians feel the pinch.
But it is not just Russians who are feeling the impact of sanctions. America has announced a ban on fuel imports from Russia, and this has already pushed gas prices to their highest ever levels. Gas prices impact the price of almost all consumer goods, considering that they need to be transported.
America has already been struggling with rapidly rising inflation, and increasing interest rates was a strategy meant to slow it down. The sanctions on Russia are now having the opposite effect. The big problem here is that rising inflation should accompany economic growth. When it is caused by other factors, we get to a state called stagflation. Stagflation is dangerous for economies, as people need to spend more while earning less.
Lowering Interest Rates to Address Stagflation
One of the ways of addressing this lack of balance is by lowering interest rates, a step the Federal Reserve has already taken and may consider again in the near future. It is not a simple step to take as, while it advantages people taking out loans, it is not good for economic growth.
This is one reason why mortgage rates have dropped following the start of Russia’s invasion of Ukraine. It is a result of a drop in interest rates in general, rather than any decisions made regarding the property market. That said, it might have a major impact on the property market.
Higher mortgage rates are likely to slow the rise of property prices by cutting demand and lowering the amount property buyers are able to borrow. The recent drop in mortgage rates is likely to be extremely temporary, but it might drive more people to buy homes in the next few weeks. Sellers and agents will be able to ask for more for properties increasing the size of the mortgage.
It is difficult to say what this means for the property market in the long run. Another burst of enthusiasm for property could cause prices to rise indefinitely. But it could also have they opposite effect. A short-lived drop in mortgage rates could leave sellers struggling to get their valuation on their properties once they start rising again. People are more willing to spend big on property when prices have been consistently going up rather than when there are spikes.
For investors in property, it is another interesting development in what has been a couple of unprecedented years for us all. It remains to be seen how the property market handles this latest shift, and how the war is going to impact the market further.