Earlier this month, investors around the world with and without interests in the US were paying close attention to the country’s non-farm payroll report. Usually, this report mostly carries implications for stocks and bonds. However, this report is being seen as an indication that interest rates may be on the rise in the near future, and this could impact all kinds of US investment assets including property.
The US has not increased its interest rates since 2006, and since 2008 they have remained barely above zero. However, the general opinion among forecasters is that a rise is coming soon, and the non-farm payrolls report is being taken as the first major indication that it is approaching over the course of 2015.
According to the report, non-farm payrolls rose by 252,000 in December. This followed a revised figure for November indicating a rise of 353,000. Unemployment fell by 0.2 percentage points, placing it at a level of 5.6%. This is the lowest unemployment level the US has seen for the past six and a half years. Overall, the US has seen monthly increases in jobs exceeding 200,000 for eleven months in a row. This is the longest continuous period for which jobs have increased at such levels since 1994.
Before the report, the last meeting of the US Federal Reserve gave the firmest indication of when an interest rate increase might arrive. That suggested that a rise would have to wait at least six months, but could be postponed into 2016 if necessary. It was even suggested that it may take until 2018 to reach the target inflation rate set by the Fed, and this along with the uncertain financial climate around the world was taken as a possible indication that rate rises might indeed be put off until 2016.
Wage growth is another key factor that investors were keen to assess through the report. This has, to date, been modest at best and could be a key reason for a delayed rate rise. While job growth is undoubtedly positive, and job growth was expected to lead to wage growth, the average hourly income has in fact fallen by 5%. Overall, the consensus is that June is the earliest that US interest rates may rise, with hopes of more positive wage figures emerging as a key reason for the delay.
The impact this could have on US property investments is clear enough, but it could also impact on other markets around the world. Quite simply, the US is one of the world’s major economies and is closely linked with the economies of other nations around the world. Furthermore, it impacts for better or worse on global demand for dollar-based assets over others, as people seek to invest where currencies are strongest, as well as demand for international assets from US investors.
But how does this affect property in particular? When interest rates rise, capital becomes less readily available because finance is more expensive. As property requires large outlays and is often funded through finance, demand and therefore capital growth are very vulnerable to the effects of rate rises. Indeed, property tends to be more vulnerable than most other asset types. Nonetheless, most forecasters still agree that even if rates rise, property investors will likely see better returns than savers.