Sinking real estate market

Key takeaways:

• Higher interest rates are a tool to fight inflation. 
• A fall in real estate prices is inevitable, which will affect the capitalisation of the entire sector.
• Real estate is a real asset, suitable for inflation protection, but first the market has to get reasonable valuation.
• The strategy is also suitable for property value insurance.

Description

The strategy aims to benefit from rising interest rates. Higher interest rates increase the cost of capital for businesses, the availability of credit for households and the general purchasing power of the population (thereby reducing inflation). Over the last 10 years in particular, the real estate market has grown through affordable credit. Construction was also financed with borrowed capital. Since the beginning of 2022, significant rate increases have already taken place and the real estate market and house builders in particular have re-evaluated. The potential can be assessed by looking at a similar crisis in 2008.

The exposure to interest rate hikes is through the most popular ETFs (TBF), with the largest US homebuilder stocks (Home Depot or similar) selected for the short position.

In order to assess the potential of the strategy, we used historical valuation data during the economic crisis of 2008. This strategy would have gained 153%. Not surprisingly, our strategy has already surpassed its target, as the 2008 crisis took place in a time of falling interest rates. These days, however, interest rates are only going up.

Real estate itself is perceived as a protective instrument against inflation, as rents can be raised in line with inflation, real estate is a physical asset and can also rise in value. This thesis holds true once the inflated valuation factor has been removed and the crisis has been overcome. It is important to remember that the property market has doubled in the last 10 years. Demand has been supported by low-cost mortgages and various support programmes.

In addition to being one of the strategies to protect against inflation, the strategy can also act as a defensive strategy to insure against declining property values.