Posted by Prashant on March 17, 2006 at 02:42:19:
I have been wondering and reading about the low cap rates. I think the low cap rates are due to the excess money in the market due to low interest rates. It seems that for the last few years the cap rates have been going down - from an average of 8% to 6%. It is even lower in markets like California where I live. I beleive that now the interest rates will rise slowly. You will see a depression in the real estate market (bad loans, etc). The higher interest rates and depression will probably affect the economy. In this case, the rents may actually go down. So, the property price will go down since NOI will go down. Additionally, since the interest rates are higher the cap rate will need to increase, decreasing the price of the property further. Some people think that the rising interest rates will not affect the cap rates and that there is a paradigm shift. Not at all. Income producing properties will be always be priced based on the income they generate. Sometimes, when the times are good and prices are rising the speculators will buy based on appreciation driving the cap rates down. Some will make profits but many will suffer. Please share your thoughts.