Yields Vs Interest Rates

May 31, 2022

It has been a constant over the past few years that yields would track interest rates. As interest rates reduced – so too did yields compress. But yields were always a couple of percentage points above interest rates. Which meant that investors could buy property at a yield higher than their borrowings.

But it hasn’t always been that way! At times in the 1970’s and 1980’s property yields were lower than interest rates – sometimes substantially so. Without the arbitrage between interest rates and yields that we have become accustomed to in recent times, there was still demand for investment property. Even when interest rates exceeded yields.

Generally the high interest rates were in tandem with inflation. Inflation, just as we are seeing now, was the major reason for the continued demand for investment property – it was and is a safe haven of real assets at a time when cash was losing it’s real value.

A change that is likely to come when the cost of funds exceeds yields, is that it will become harder for investors who rely on debt to make money. Or, to flip that around, investors who are cashed up, or relying on equity, will be more prominent in the market.

It’s not impossible to make money in a market where interest rates exceed yields. But it is a different mindset than we have seen over the past generation, and one where increased rental rates and hedging against inflation with real assets both play their part.          


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