The era of falling rates

Interest rates that are higher for longer would weigh on real estate valuations and transaction activity, but permanently higher rates present a different threat entirely. 

The onset of rate hikes in late 2021/early 2022 set off a debate among economists as to whether something enduring had shifted in the global economy. Could it be the case that the period of falling rates that characterized the post-Global Financial Crisis boom in property values was an anomaly?

Bank of England researchers attempted to tackle that question last week. They take the view that there are two powerful forces exerting long-term downward pressure on global interest rates. Firstly, the world's aging population means that people reaching retirement can now look forward to living another twenty years or so - a figure that will rise to almost 30 years for coming generations. That will require a massive surge in savings, which banks will lend to firms chasing diminishing returns, weighing on market interest rates - you can read a fuller explanation here. 

Secondly, slower productivity growth means firms have lower expected returns on their investments, which reduces the demand for capital - again, weighing on rates. This factor feels a little shakier, given what little we know about how Artificial Intelligence could impact productivity in the coming years. Nevertheless, the researchers conclude that, "without a reversal in these trends, or new forces emerging to offset them," long-run global interest rates will remain low. Here’s hoping.