Real estate is highly sensitive to interest rates. Since the 1980s, house prices have benefited from steadily declining mortgage rates. This year, near-zero rates are helping support prices in the face of job losses, rising debt loads and an uncertain economic future.
The sensitivity is revealed when you make a small change to the cap rate. In the example above, if income stays the same but potential buyers demand a seven per cent return , the property value falls to $3.6 million. A rate increase of two percentage points translates into a 28 per cent price drop.Article content continuedWhat you own, and how you own it, are also important considerations. For instance, the amount of debt against a property influences how you factor it in.
Life insurance stocks are good income alternatives, as are reset preferreds. Both tend to do well when interest rates are rising, making them an offset to your real estate.Article content continued
Property ownership should be abolished because they exploit the renters. All Canadians should get a free house when they turn 18.