The recent tightening of interest rates has had an impact on real estate markets worldwide, with residential mortgage borrowers experiencing increased payments and decreased affordability, while developers find it harder to secure financing. However, history suggests that a Fed tightening cycle can be a good time to own U.S. real estate. Historically, the Fed has used quantitative tightening to control inflation, with real estate often labelled as a "classic inflation hedge". This was observed in the late 1970s, when property returned 20% a year as the key Fed rate was hiked more than 1200 basis points. In the much less inflationary 2004-06 rate-hike cycle, property again returned almost 20%. This time around, the Fed's rate ceiling seems to have settled around 5% and could pose another opportunity for the asset class.

"Investors generally recognise that, where it hasn’t already, pricing needs to adjust further to reflect the reality of a global economic slowdown...As some seller attitudes switch from a position of reluctance to necessity, more supply should come to the market."

Macro Bond

The current banking crisis in the U.S., triggered by the sharp rise in interest rates and the decline in the value of government and federally backed mortgage bonds, has led to an outflow of deposits from small and medium-sized banks. The fiscal and monetary policy response to the pandemic boosted bank deposits, falsely believed to be "sticky", but smartphone and online banking apps have made deposit balances more sensitive to short-term shocks. While larger banks seem to be doing well, smaller and regional lenders are struggling to retain deposits and are exposed to commercial real estate loans. Although a recession would boost defaults, it might also result in falling interest rates, which would in turn lift the value of bond portfolios. Without expanding federal insurance to cover all deposits, small and medium-sized banks may be confronted with a prolonged period of deposit pressure, potentially leading to acquisition or lending restrictions.

Cargill Inc., the top agricultural commodities trader, has announced it will cease its exporting of grain from Russia, the world’s largest wheat exporter, adding to a growing uncertainty over the future of Black Sea crop shipments. While Russian crops are not under sanction, trade can be complicated by restrictions on Russian banks and state companies. International grain traders have also faced growing pressure to leave from Russian officials and the local industry. Although Cargill is a significant exporter of Russian wheat and a major Western crop merchant, the government has assured that the company's decision will not impact the country's overall shipments. Some foreign traders have already reduced their involvement in the Russian market, while others have been able to capitalize on the price fluctuations caused by the ongoing conflict.

Written by:

Andrew Popp | Sr. Research Associate