Let’s look at loan market predictions for 2017 based on the information we have and trends we can safely project into the future.
Continued Deflationary Pressures Drive Investor Decisions
Institutional debt is deflationary. When a nation has massive debt payments to pay for prior deficit spending, today’s taxes are increasingly committed to paying for last decade’s excessive spending. The high level of debt and large percentage of the tax base spent to service that debt also limits or outright prevents taking on new debt to finance more deficit spending.
This limits the ability of the government to invest in infrastructure and basic research to create long term growth. And the high tax rates needed to pay for a prior administrations’ excessive spending takes money out of the hands of taxpayers, limiting consumer spending and hindering the economy. We saw this after the last Labour government.
Quantitative Easing and Interest Rates
Widespread quantitative easing has led to artificially low interest rates in the EU. Investors chose to buy government bonds with negative interest rates (interest rates lower than the rate of inflation) because they voluntarily sacrificed returns for the safety of government backed investments. This in turn has kept mortgage rates low.
Interest rates for mortgage loans are likely to remain near the rate of inflation in 2017, but they will start to creep up over the next twelve months.
The flipside of this has been desperate investors pouring money into any investment that yields a real rate of return, returns higher than the rate of inflation. This is why the stock market in the US has boomed despite the tepid economic growth since the Great Recession ended. There were trillions of dollars searching for positive returns, and the promise of dividends on stocks and likely capital gains were the best bet. The same search for returns has driven up the prices of properties in the private rental sector, although recent UK government tax reforms have dampened enthusiasm somewhat.
Government Policies Will Dampen the Hottest Markets
The low interest rates nearly worldwide have led many people to buy investment properties and anyone who could afford it to buy a first home. One of the new trends is secured loans (for more information about secured loans, click here) and using the capital to invest in a variety of ventures.
Property prices have skyrocketed in high demand markets like Vancouver, Toronto, London and Beijing. Many countries have changed their laws to dampen their hottest property markets, as experts fear the bubble will eventually burst, triggering another recession.
In the coming year, expect interest rates to remain low due to deflationary pressure from the sheer size of the debt many nations carry. Property loans are certainly affected by regulatory changes to try to dampen the hottest housing markets, though this varies based on where you live and where you are trying to buy a home.