For those of us whose livelihood is impacted by property transactions, there is one fundamental question that we should be thinking about:  what happens to transactions volumes if interest rates rise rapidly (and possible reach double digits)?

You'd think that transaction volume would have to be negatively impacted, right?  After all, if the cost of capital increases, the cost of ownership increases.  And if the cost of ownership increases, fewer people (or businesses) can afford the property. 

But recently I heard an economist (who specializes in real estate fundamentals and forecasting) disagree for the following reason.  If we have more aggressive inflation, the price of everything increases; not just the cost of capital.  Included in the definition of "everything" are most commercial products and services and wages.  So if companies are able to pass along price increases to their customers, and if workers see earnings rise, then they're also able to afford the higher priced property or home.  Basically, his point is that "it's all relative".

Rubbish!  I don't see any way that rising interest rates can be anything other than a drag on transaction volumes.  All one needs to do is look at 2002 through 2007 as a recent example.  During this time, rates were low, financing was easy and transactions exploded in both the commercial and residential markets. 

So if you're planning and budgeting, and if need to develop a theory for what business might look like in 5 to 10 years, ask yourself this question:  what is the most likely long term trend for interest rates?

Given the U.S has unfunded Social Security and Medicare liabilities of over $100 trillion, I think the long term interest rate directions should be rather clear.