Do interest rates effect supply and demand?

scoobiesnacks

I'm trying to buy in Greenwich but demand is outstripping supply by a considerable margin. There's very little on the market and what does come on goes in a day or so. So it got me thinking, at the moment I can't see any end to this problem. Clearly there needs to be a better balance between supply and demand. Would a rise in interest rates redress the balance and if so why? What other factors effect supply and demand?

lightspeed

IR's will have some impact on demand for property as buyers begin to realise that rates have a direct effect on the mortgage IR's that are offered. Changes in affordability brought about by higher IR's will make some buyer's to rethink their budgets.

How much difference 1 or 2 quarter point rises will make reamins to be seen but it will certainly have a slowing effect on borrowing and as a result the amount of potential buyers is also likely to reduce.

Other factors include employment, property type and value for money, location and any anticipated changes in the economy.

Supply and demand is likely to be affected by several of the above factors opposed to just just one. E.g a 0.25 rate hike on its own may have little or no impact. A 0.25 hike with increased unemployment and/or the realisation that that once affordable property at the low rates has now become unaffordable.

lynzpower

Does of course depend on the individual vendor.

1% rise for me would be a bit of a struggle, it might be too for others that have overstretched themselves.

FaTB

I imagine a rise of just 1% would hurt alot of people who are already paying a large lump of their income on the mortgage.

That added to all the other rises in the cost of living that have been making life uncomfortable recently.

But apart from that it will bring an element of uncertainty, which will change sentiment !!

ManAtHome

Of course it does - too many people only look at "pounds a week" and (thanks to BoE fixation on inflation rather than money-supply) believe that 4.5% is as high as it goes. Once people get away from thinking that an enormous loan doesn't just go away after a couple of years, that you'll never split up , be made redundant, fall ill etc a bit of common (??) sense just might creep back in...

F_T_Buyer

scoobiesnacks wrote:

I'm trying to buy in Greenwich but demand is outstripping supply by a considerable margin. There's very little on the market and what does come on goes in a day or so. So it got me thinking, at the moment I can't see any end to this problem. Clearly there needs to be a better balance between supply and demand. Would a rise in interest rates redress the balance and if so why? What other factors effect supply and demand?

What a lot of people forget, is Supply of houses and Demand of buyers always equal. It's the price that fluctuates that changes supply and demand. Houses don't just disappear into thin air. Those that do not sell (e.g. those still on the market) and those that do not buy (e.g. those still looking), are not part of the market.

A better example is the stock market, where the number of sellers has to match the number of buyers. The price of the stock fluctuates to ballance the two - and with the stock market it can fluctuate in seconds, whereas the housing market takes years.

I say this point, because a lot of people say they are x number of FTBs who want to buy a home, so house prices will surely go up. Yet it ignores the fact that they can't afford a home, whereas those who can afford are significantly less in number.


Coming back to interest rates, the lower the interest rate the more the buyer can borrow. The more they can borrow, the more they can afford, meaning they are more buyers at the current price level. If supply does not change, the price will rise until the number of buyers (who can afford) reduces to match the sellers. If rates go up the opposite will happen.

The problem with rising rates, is it will initially reduce the amount people can borrow, so reduces demand. Also, as rates increase some [potential] sellers may realise they can't afford the house anymore and need to sell, hence increases supply. You need to also bear in mind those on fixed rates.

Other issues that affect supply and demand?

- employment/unemployment
- income
- other living costs (e.g. increased costs of heating, food etc)
- demographics
- immigration
- rents
+ lots more

The one biggest factor is the physcology/sentiment. They are alot of people how hold onto houses because it is (they think it is) going up in value. If prices stop going up, or fall they may decide to sell. I think this band wagon, or herd instinct is the biggest and most important unknown factor IMHO. It's also the reason why prices (not just houses) always undershoot the fair value at the bottom - just like what happened in the 90s house price crash.