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How interest rates affect property values
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HAMISH_MCTAVISH wrote: »Quite.
Base rate 2003 - 3.5% - Average house price - £135,000
Base rate 2007 - 5.75% - Average house price - £185,000
Base rate 2009 - 0.5% - Average house price - £149,000
Interest rates only have an effect on house prices at the absolute margins, where we are rammed right up against the outer limits of affordability, and the UK simply hasn't been there at any point in the last few decades.
The bigger factor by far is the shortage of housing, which is being markedly worsened by mortgage rationing.
No, you've picked a short period to suit your view. Houses can increase or decrease during rate movement periods based on wider economic conditions. But ultimately, increasing the supply (of credit) and decreasing the cost (of credit) will move house prices upward in areas of demand > supply.0 -
HAMISH_MCTAVISH wrote: »
The bigger factor by far is the shortage of housing, which is being markedly worsened by mortgage rationing.
or increase in population, depending which way round you look at it
your figure for base rate could also read
2016 - 0.5% - Average house price £285,000*
*- this is money article this morning0 -
or increase in population, depending which way round you look at it
Well that's not going to end any time soon.
Unless we build more houses, the shortage will worsen, and house building remains at near 100 year lows largely because of the ongoing dysfunctionality in lending markets.your figure for base rate could also read
2016 - 0.5% - Average house price £285,000*
*- this is money article this morning
Apples and Oranges - latest data point from the same series I used is 197K, which is only marginally above the level it was 8 years ago.“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0 -
AnotherJoe wrote: »Wow that article takes several thousand words to say nothing. And it provides no actual facts not even a sorry sort of half baked correlation to show how interest rates affect prices.
I note your article is entitled "how" but doesn't actually say how . For example, let's say interest rates rise half a percent tomorrow.What will happen to house prices in the next three to six months?in numbers.
You could calculate the how yourself though. Here is my summary:
House prices are a function of many many variables. So there is no definite rule that says if interest rates rise, house prices must fall. Or vice versa. This is because interest rates could be rising due to outstanding economic conditions with wages rising fast and population increasing. Both of the last two things will contribute to pushing house prices upwards and the interest rate rises may have negligible downward affect.
But that isn't the same thing as saying that interest rates are irrelevant. Every one of the variables in a function are relevant to some degree. I believe that interest rates have a large impact under certain conditions. When there is constrained supply, so demand exceeds supply and conditions are otherwise good, people will bid prices upward. It makes sense to examine what factors are at play in determining the upward bids. And that is where rates and mortgage terms come in. Their ability to do so is determined by how much they can pay on their mortgage payments each month, and how much they can borrow.
If rates are decreasing, people can borrow more and still pay the same monthly payments. It really is that simple. And this isn't me making up some crackpot theory. This is just standard economics.0 -
But ultimately, increasing the supply (of credit) and decreasing the cost (of credit) will move house prices upward in areas of demand > supply.
Mortgages are issued based on a multiple of the applicants earnings and not the prevailing interest rate.
The good people of Stoke have been exposed to the same credit conditions but didn't go on a bidding frenzy so I tend to think increasing supply would be a better way to moderate London HPI.
Reducing prices by restricting credit availability could work but would be to the benefit of the better off.0 -
No, you've picked a short period to suit your view. Houses can increase or decrease during rate movement periods based on wider economic conditions.
I see.
So basically your theory is that interest rates are the primary determinant of house prices.
Except when they aren't...;)ultimately, increasing the supply (of credit) and decreasing the cost (of credit) will move house prices upward in areas of demand > supply.
As you admit, you can throw endless credit at goods where there is no demand and a surplus of supply and prices won't move.
Hence why a 3 bed Victorian terrace 'oop north' costs £60K while a near identical house in London costs £1m.
The supply of credit and the cost of credit are identical in those two areas... Yet the prices are markedly different. That difference can only be caused by the supply and demand for houses themselves.
Which brings us back to my point that it's actually the supply and demand for houses that is the primary determinant of house prices.“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0 -
You could calculate the how yourself though. Here is my summary:
House prices are a function of many many variables. So there is no definite rule that says if interest rates rise, house prices must fall. Or vice versa. This is because interest rates could be rising due to outstanding economic conditions with wages rising fast and population increasing. Both of the last two things will contribute to pushing house prices upwards and the interest rate rises may have negligible downward affect.
But that isn't the same thing as saying that interest rates are irrelevant. Every one of the variables in a function are relevant to some degree. I believe that interest rates have a large impact under certain conditions. When there is constrained supply, so demand exceeds supply and conditions are otherwise good, people will bid prices upward. It makes sense to examine what factors are at play in determining the upward bids. And that is where rates and mortgage terms come in. Their ability to do so is determined by how much they can pay on their mortgage payments each month, and how much they can borrow.
If rates are decreasing, people can borrow more and still pay the same monthly payments. It really is that simple. And this isn't me making up some crackpot theory. This is just standard economics.
Wouldn't it be simpler to just acknowledge that prices are always set by supply and demand?
And that factors such as the cost and availability of credit are merely one of many components of effective demand?“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0 -
Mortgages are issued based on a multiple of the applicants earnings and not the prevailing interest rate.
The good people of Stoke have been exposed to the same credit conditions but didn't go on a bidding frenzy so I tend to think increasing supply would be a better way to moderate London HPI.
Reducing prices by restricting credit availability could work but would be to the benefit of the better off.
You'll have to ask the people of Stoke why they don't want to buy houses. According to your own stats the prices are well within lending multiples vs average salaries and mortgage costs are less than rent. Why do you make the assumption that the people in Stoke are special cases that the banks don't want to lend to at much safer levels but in neighbouring booming towns with higher prices, banks are fine with those people. How does that argument make sense? Maybe people just don't want to pay higher prices in Stoke and so credit costs are irrelevant.0 -
If rates are decreasing, people can borrow more and still pay the same monthly payments. It really is that simple. And this isn't me making up some crackpot theory. This is just standard economics.
Yes, the maths stacks up but that's about all.
Decreasing rates means people can borrow more for the same repayment but it's a stretch to assume they will or be allowed to borrow more when it comes to houses.
You know this - look at any 'how much can I borrow?' mortgage calculator.0 -
How does that argument make sense?
:wall:
You really do seem like a reasonably smart person.
How is it possible you can't understand this concept?“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0
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