Tuesday, October 10, 2017

What happens when interest rates fall



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Today we had news that ING were decreasing the remuneration of its savings account down to 0.05%, which earlier last year was at 0.5%; it is one of the last banks to decrease to these levels, caused by the extremely low interest rates in the Eurozone.
In fact, with inflation far higher than those rates, we don't just not earn money with deposits, we actually lose.
Also, last month the European Central Bank decided to mantain the rate at 0%, so I think this situation may mantain itself for quite a while yet.
While investing in shares would be the reasonable choice, most people are wary and avoid them, the so called "playing with the stockmarket", having suffered bad experiences themselves, or someone they heard from. As such, they invest in what they know they can trust:
The real estate sector.
And thus the situation for example in Spain, where houses are rising in prices all over the country, but in cities like Barcelona and Madrid they are rising 20 and 15% per trimester compared to the same period last year, and other main cities will follow, such as Valencia or Seville.
The number of mortgages to buy houses increased in July by over 30% compared to the same period last year, after 3 consecutive months rising already.
Of course, banks are plenty happy about this. On one hand they receive money from the European Central Bank at 0%, and on the other they lend it to their clients at up to 3%.

I'm not against buying a house where to live or to diversify if I were to reach a large fortune, but as a middle-class person, buying a second home for holidays, or for renting is out of the question for me. A property you don't live in can be more easily robbed, illegally occupied, or damaged by your tenant. Tenants can also decide not to pay, and depending on the laws of the country, evicting them can be a nightmare.
In contrast, investing in shares means I buy and sell my property with the click of a button, I sleep peacefully knowing my money is relatively safe, and the rentabilities are great, as I'm far more likely to be paid a dividend, than for my flat to be continuously occupied by tenants that always pay on time.
Personally, I think I will always choose my main investment to be in high dividend yield companies, rather than investing in the real estate sector.
As always, best of luck in your investments.


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