Throughout all the years that I have watched the real estate industry, I have heard financial experts caution everyone, “If interest rates rise, it will cause the real estate market to slow or crash.”
After all these years I have come to realize that this has never happened. At the risk of sounding like one of the spectators at the parade of the Emperor’s new clothes, I declare, the financial experts are wrong. Interest rates have no bearing whatsoever on the real estate market.
Interest rates have risen in the past but I have never known them to actually affect the real estate market.
It has become obvious to me that it is the real estate market and no other factor that controls the economy. It is the real estate market that drives interest rates, not the other way around.
Each time the economy pulls out of a slump, it is the real estate market that begins the process. It is the real estate market that sustains it. When the real estate market picks up again, interest rates become competitive.
Everything follows from there. Automotive sales. Jobs. Manufacturing. Everything.
Go ahead, look it up. Whatever has happened in the economy, at least in all the years I have been watching, has been preceded by the real estate market. Nothing else has affected the economy this way.
Four years ago, the automotive industry experienced a slow down in sales. Financial experts said this would cause trouble ahead for the entire economy. Financial advisors were on radio talk shows pointing out that one out of every five jobs in the country depended on the auto industry so things looked bleak.
But the real estate market was robust. Interest rates did not even blink. In fact they went down, not up. They were being driven by the competition for financing for all the housing that was being sold.
The auto industry? So what? It staggered and then came back. It did not trigger a slow down in the economy. It had no affect.
How about the oil crisis during the 1970s? Well, there was an oil crisis in the fall of 1973. Period. Not during the 1970s. Financial experts predicted dire economic hazard ahead.
But the real estate market held throughout those months, and because of that, everything else did too. The economy was fine.
In 1979 the real estate market slumped and then went flat. The following year, 1980, interest rates went out of control. Many people renewed mortgages at over 20 per cent. Automobile sales soured. People lost jobs.
The economy was in peril. People called it a recession. It was all because the real estate market had slowed.
In late 1981, the real estate market began to percolate. Real estate sales doubled, then tripled and soon housing was booming. Interest rates went down. People were working again and buying cars. Everything in the economy was good again. It was all driven by the real estate market from the start.
In 1992 the real estate market suddenly stopped. This time it had not just slowed. It crashed. For reasons no one to this day is able to explain, real estate was not attractive anymore. And the entire economy ground to a halt.
Mortgages were in default, from Cabbagetown in Toronto to Canary Wharf in England to developments in New York and throughout the United States.
Newspapers ran photos of people on the street with signs that said, “Will work for food”. Interest rates went up after the real estate market crashed.
Financial experts, about the only people still working, said banks had to recover all the money they lost on mortgages so that’s why they raised interest rates. Most people believed them.
Then in 1996 the real estate market began to get active again. No one could say exactly why but sales became brisk again. Then robust. It has been sustained to this day.
So now I see that the financial experts are on the talk shows again warning that the rising costs of oil will mean trouble for the economy ahead. I don’t think so.
The only economic factor to watch is the real estate market. I don’t see it slowing down.
Heino Molls is publisher of REM. E-mail [email protected] or discuss this article in the REM Discussion Forum. .