Rising interest rates around the world could make it more expensive for Hawaiʻi residents to buy homes, for businesses to grow and for state and county governments to fund public projects, according to a new analysis from the (糖心视频ERO).
In a new piece published October 12, 糖心视频ERO economist Peter Fuleky examines why long-term borrowing costs have climbed and how the trend could affect Hawaiʻi’s economy.
The yield on the benchmark 10-year U.S. Treasury note rose above 5% in September for the first time since 2007. These yields help influence interest rates for major purchases, including homes, because lenders use them as a benchmark when setting loan rates.
Significant Hawaiʻi impacts
For Hawaiʻi residents, the impact is especially significant given the state’s high housing costs. The analysis estimates that a buyer purchasing a median-priced Oʻahu single-family home of about $1.18 million, with a 20% down payment, would pay approximately $6,270 a month in principal and interest at a 7% mortgage rate. At a 3% rate, the monthly payment would be about $3,970—a difference of $2,300.
Higher rates can also discourage homeowners with lower-rate mortgages from selling, limiting the number of homes available for sale and adding to housing market challenges.
The effects extend beyond housing. Local businesses may face higher costs to finance expansions and operations, while state and county governments could pay more to borrow for infrastructure projects, leaving less money available for other public services.
Hawaiʻi’s tourism industry could also feel the effects. Higher U.S. interest rates relative to Japan’s can contribute to a weaker Japanese yen, making travel to Hawaiʻi more expensive for visitors from Japan.
Several factors are contributing to rising borrowing costs, including large government budget deficits, concerns about future inflation, changing investor demand for government bonds and uncertainty about future interest rates. The Federal Reserve raised its target interest rate by a quarter percentage point in September to help contain inflation.
Fuleky’s analysis notes that the duration of higher borrowing costs will depend in part on energy prices, the Federal Reserve’s response to inflation and whether governments address growing debt. For Hawaiʻi, the outlook matters because global financial conditions can directly affect household budgets, local investment and the cost of public projects.
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