It seems that the interest rate hike by the Federal Reserve Bank in the United States is affecting the real estate market more and more. Eric Peters, CIO of One River Asset Management, Shares In a new release, raising capital for real estate projects is difficult. “The credit market started tightening six to nine months ago,” he said.
Silicon Valley banking was the final straw
Getting good loans for real estate projects has been tougher in recent months, but after the drama surrounding Silicon Valley Bank, Peters says the market has completely frozen. “The lender for our latest 30-storey project in a major city has dropped out. After that, we talked to more than 100 banks and none wanted to finance us,” says the investor.
“The Federal Reserve needs to bring liquidity and lower interest rates to stop this chaos,” he continues. So far, prices have not yet come down due to high interest rates, but now the construction of new projects has also fallen drastically.
They usually finance the construction of new projects through ‘construction loans’ which carry a relatively high interest rate. Once construction is complete and tenants move into the property, they pay off the loan and refinance it at a lower interest rate.
The problem is that construction loans are now at 4.0 – 4.5 percent, after refinancing they will be 6.5 percent or 8.5 – 9.0 percent. According to Peters, this is the reason why the real estate market is currently completely paralyzed and if not resolved soon, it will cause major problems.
‘We’ve never seen this before’
“During the 2008 cycle (the credit crisis) we also created real estate. But what we’re seeing now is something completely new. This will cause new real estate production to come to a complete halt,” says Peters. Slowly but surely, we’re starting to see the effects of Federal Reserve rate hikes throughout the economy.
It remains to be seen what awaits us in the coming months. As a central bank, you cannot expect an economy that has been operating at 0 percent interest rates for years to continue operating at 5 percent interest rates.
The next Federal Reserve interest rate meeting is scheduled for May 3, and a rate hike of 0.25 percent is expected for that meeting. Avoiding a recession is becoming increasingly difficult, and the Federal Reserve appears to be targeting recessions to reduce inflation.
For Bitcoin, we have yet to see what that means. In general, a recession is not a favorable development for risk assets. You usually see people fleeing to the US dollar at the start of a recession because they have to pay their bills with it.
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