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Before discussing lower interest rates: assessing the USA context

Laurynas Žilinskas
Before discussing lower interest rates: assessing the USA context
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This article was published on delfi.lt

Residents and investors who already possess or intend to acquire loans for real estate have been living with hopeful expectations in recent months, anticipating a faster decrease in interest rates. However, as noted by Laurynas Žilinskas, head of financing of the real estate investment platform InRento, not all signs are favorable to this positive scenario.

Who will have more influence – the EU or the USA?

Although further interest rate hikes are unlikely given the latest inflation figures, it is still quite bold to talk confidently about the prospect of base rate cuts. Despite the fact that inflation rates are slowly stabilising and the Eurozone is approaching its target, the situation in the United States is not yet so favourable for a downward movement of the interest rate curve.

"Usually, when inflation rises in the US, the same trend is observed in Europe, but now we are seeing a different picture – in our region inflation has fallen to 2.4%, while in the US it is still higher, and has even risen to 3.5%." Laurynas noted.

Unlike in Europe, the effect of rising base rates on inflation in the US has not had the desired effect. As the financial expert notes, the interest rate increases had a more pronounced impact on real estate, but general consumption was resilient. Therefore, despite the fact that the US central bank has been talking about a possible interest rate cut for some time now, such a scenario is unlikely when the inflation level is rising and we cannot rule out the less likely scenario of interest rate increases as well.

Despite the fact that recently inflation in Europe has been declining steadily, it should be remembered that both in Europe and the US it has not yet reached the 2% target, so it is still too early to paint only positive scenarios of interest rate cuts," said Laurynas. Although the current situation could change the historical practice of the Eurozone following the direction of US interest rates, it should not be ruled out that US monetary policy decisions will continue to have an impact on the decision-making process on the future level of EURIBOR. In this case, we should not expect a rapid and large rate cut."

High EURIBOR – can property owners and developers benefit?

Over the past 15 years, the record-high EURIBOR interest rate and high inflation have posed a significant challenge to the real estate market – as the purchasing power decreased, the real estate market has been forced to slow down. However, this potentially creates favorable conditions for the development of new projects and real estate rental activities.

"High interest rates or an increase in the cost of money slows down property development and naturally creates a shortage in the market, while projects that have already been developed can potentially generate higher returns due to demand outstripping supply. Also, the slowdown in the market creates opportunities to develop a variety of real estate projects that could potentially generate above-average returns," explains the head of financing at InRento, but those who are considering buying real estate for investment should not do so without a clear plan. 

Although rental property investment is still one of the most attractive forms of investment for Lithuanians, the ever-decreasing interest rates can become a burden to bear. Moreover, successful property investment is not as simple as it may seem at first, as many different aspects need to be understood in order to achieve a stable return.

"For a long time we have been used to "free" money, but it seems that those days are over. If you want to invest successfully in real estate, you should weigh up your decision responsibly, because we probably won't go back to the era of 0% base rate. A more attractive option today is to invest your money with the help of professionals who know their job and can find good deals even in difficult market conditions," says Laurynas. InRento, a platform for investing in rental projects, offers the opportunity to put your money to work in the real estate market without having to buy a home, by financing projects run by professionals.

The numbers speak for themselves – over the years we have attracted over EUR 24 million in investments, the average annual return on investment is more than 11%, and even in a difficult market situation we do not have a single delayed project and we are making our investors happy with higher than expected project returns.