How interest rates affect property values

mwpt

BoE also seem to think that lower interest rates boost property prices.

http://www.bankofengland.co.uk/monetarypolicy/pages/how.aspx

For example, lower interest rates can boost the prices of assets such as shares and houses. Higher house prices enable existing home owners to extend their mortgages in order to finance higher consumption. Higher share prices raise households’ wealth and can increase their willingness to spend.

ukcarper

mwpt wrote: »

BoE also seem to think that lower interest rates boost property prices.

How much do you think low interest rates have in Influence prices, prices in London have increased by about 75% since rates were lowered, but earnings to price ration have not increased significantly .

cells

mwpt wrote: »

BoE also seem to think that lower interest rates boost property prices.

The problem is you are doing a thought experiment in your mind and changing interest rates from one moment to the next. In the real world there are many variables and most of them move fairly slowly.

So if interest rates go up to 10% tomorrow then you are correct house prices in a year time will likely be lower (and a crash in volumes)

However you ignore the fact that interest rates dont just jump to 10% without reason. If we try to think of one of many possible examples of how interest rates can go to 10% one might be that wages start increasing big time and that feeds to inflation so the BOE puts rates up

So in isolation you can claim and would likely be right that if ALL OTHER FACTORS were the same and rates went up property prices would fall. However if rates go up to 10% over a period of 10 years and wage inflation is 10% a year for those 10 years then what will happen to the price of property? in nominal terms it will almost certainly be higher. So you would have a case of higher rates but higher prices too.

Now take the opposite. Lets say the economy tanks for whatever reason and lots of jobs are being lost and everyone becomes super cautious. The BOE reduces rates to try and up the economy. Your argument of lower rates = higher prices simply woudnt hold the other factors would overpower that

cells

mwpt wrote: »

BoE also seem to think that lower interest rates boost property prices.

low interest rates should boost building of new homes which should push rents down. Of course interest rates can move faster than the stock of homes and increase so they are probably correct. However the economy can move just as fast as rates so its quite conceivable that in the short to mid term lower rates or higher rates can mean anything depending on the economic conditions.

Hence why we have places like the north not moving (poor economic growth and less population growth) and London on fire (very strong economic growth and population growth) even though both are subject to the same currency and its rates and mortgage rationing or not

Catapa

House prices are affected by how much mortgage people can take on, interest rates being an important aspect.

We have enjoyed low inflation and low interest rates for the past 20 years. That will change with Brexit.

In 2006 £1 was worth €1.45, ten years on the Pound has dropped to €1.26, in other words Sterling is weaker than the Euro and will weaken further with Brexit nearing! Importing much food, energy and pretty much everything else, a weaker pound makes life in the UK dearer and will soon lead to a rise in inflation. Inflation will put pressure on the Bank of England to raise interest rates, which will lead to a drop in house prices, negative equity, … and a vicious downward spiral: http://iitm.be/€urish

Thrugelmir

Catapa wrote: »

We have enjoyed low inflation and low interest rates for the past 20 years. That will change with Brexit.

Funny how memory can play tricks. I don't remember low mortgage interest rates in the late 90's. Low interest rates came on the back of freely lending banks. With sub base rate deals in the early 00's. There's going to a shock once normality eventually returns.

mwpt

http://www.telegraph.co.uk/business/2016/03/02/low-interest-rates-spark-house-price-boom-across-europe/

House prices are rising or stable in all major European economies thanks to ultra-low interest rates, according to a new analysis by Standard & Poor's.

Low rates are being passed on to consumers, allowing home buyers to borrow more money to fund bigger property purchases - in turn pushing up prices.

...

"We expect the ECB's accommodative monetary stance, leading to historically low sovereign bond yields and mortgage interest rates, will spur improvements in all housing markets," said economist Sophie Tahiri at Standard & Poor's.

Generali

wotsthat wrote: »

More people are buying with cash in London so aren't using debt at all so interest rates come out of the equation altogether. Also, people buying with mortgages in London tend to have bigger deposits and more likely to be accepted.

That isn't necessarily the case. Someone buying a house as an asset rather than as a home isn't buying a different asset. If we accept that interest changes impact on the price and yield of non-house assets then they will also impact on the price of houses.

The thing with houses, as opposed to bonds which are a very pure 'interest rate play', as we would probably say at work if we were ducks*, is that there are many other determinants of their price as well. Interest rates definitely have an effect on house prices, not even IMO, but so do other things like availability of credit, house building, tax treatment of investments, trends in investing and the rental market.


*I don't mean ducks

ukcarper

mwpt wrote: »

http://www.telegraph.co.uk/business/2016/03/02/low-interest-rates-spark-house-price-boom-across-europe/



...

You need to provide some evidence that people are borrowing more from what I can see the increases is marginal and could account for a small increase in prices but not the very large increase we have seen in London.

mwpt

ukcarper wrote: »

You need to provide some evidence that people are borrowing more from what I can see the increases is marginal and could account for a small increase in prices but not the very large increase we have seen in London.

You should write to the economist from S&P and ask.