I’m a layman, not an expert by any means but wouldn’t interest rate increasing mean spending, including buying property, decrease? Would that not mean that house prices would fall to intice more spending?
I understand currently interest rates are normal zing or falling but hasn’t this been the case for many years now since COVID lockdown?
In: Economics
Can’t speak to all markets, but in the UK:
Population growth outstripping house building.
Smaller household size (Increase in divorce etc) adding to the lack of houses.
Local authority housing being sold off and not replaced, reducing the option to rent and increasing the necessity to purchase to avoid…
Buy-to-let mortgages allowing small investors to acquire large property portfolios further decreasing the supply of houses.
Mortgage terms in general; 1970s was based on 3.5x 1 income. Thatcher allowed financial reforms that meant 2 people’s income could be assessed for mortgage needs (effectively doubling the cost of houses).
So, demand outstrips supply, purchasers have more credit to spend on houses and therefore prices go up.
(Edit: pressed ‘return’ too soon).
In theory yes.. but maybe in reality it only leads to prices increase less than they would with lower interest rates.
We still have in many western countries not enough housing. (or not at the right locations) That’s the root of the problem. If you have more demand than supply prices will increase.
As long as you can find enough people able and willing to pay high prices and high interest rates.. prices will increase.
If nothing else was changing, yes, interest rates on their own should lower house prices.
However the root causes of high house prices haven’t gone away, and some side effects of high interest rates make the situation more complex.
The pandemic caused shortages/delays/high cost for practically everything. Building a house takes a lot of time/planning and is already expensive. The labor and materials shortages alone would have already slowed and decreased the number of houses being built. Add to this, the builder is betting any house they start building now will sell for enough to make a profit months to years in the future. This is risky and unappealing in an uncertain economic climate. So the expectation that interest rates could go up in the future, or that there could be other types of economic slowdown, made companies reluctant to build houses which in turn made prices stay high longer. Combine this with the existing issues that land in a desirable location is scarce and expensive, and there haven’t been enough houses to go around for a long time, and there are a lot of fundamental reasons housing is too expensive, which could never be fixed overnight.
The other problem is that most houses are not new, and the current owners usually want to buy a different house to move into. This is more costly and often doesn’t make any sense while interest rates are so high. Due to the high cost to *move*, the number of houses being sold is relatively low. This means there is an even more lopsided low-supply/high-demand balance for the few houses that are available today. This effect is easing and houses are becoming more available, but none of this is enough to dramatically bring the cost of housing *down* overnight.
In general, you would expect higher interest rates to lower housing prices. However, there are two things to keep in mind:
* Firstly, the higher interest rates lower housing prices compared to what they would be in an alternative reality where the interest rates were lower, not compared to the housing prices in years past. If the fundamentals were in place for a larger increase, the interest rate can reduce the increase, while house prices still increase compared to the past.
* Secondly, housing has a dynamic where sellers will just choose not to sell if they can’t get a good price, because they can’t sell if the sale price doesn’t allow them to pay off their mortgage and get new housing elsewhere, which lowers demand and mitigates potential price drops. You’d need mass foreclosures to really see a drop because of this dynamic, and the banking world has been a lot more strict on who they’ll lend money to because they don’t want another subprime loan crisis on their hands, so that doesn’t seem likely.
New homes are being built at a slower rate and the new homes that are being built, are being built for way above “normal” expected costs. For example, there is a new development going up near me. When they started pre-pandemic, the signs said coming soon starting in the low 400s ($400,000). Now it says starting in the low 500s. That is just inflationary pressure in labor and building materials.
Add to the market the fact that my house is now worth $100,000 more than when I bought it, but if I sold today I would have to downgrade my situation in order to make out from the sale. Why would I consider moving?
So there is also a shortage of already built homes going up for sale, which only further drives up the market price. Interest rates might have an effect on how many people are willing to buy, but it is not enough to offset the massive difference seen in supply and demand.
Very simple in the UK, just aren’t enough houses so demand pushes prices up. The number of people goes up faster than the number of houses. Very high student population so some property sits empty for part of the year in anticipation of high rents during term time. Very high potential income from short-term holiday rentals so again lots of homes which could be used for permanent residence instead used to accommodate tourists and sit empty for part of the year. Multiple properties owned by a single family used for seasonal trips etc. Some property being sat on speculatively, quite a lot of this where I live in scotland as the developers try to negotiate splitting large buildings into lots of rental units, there’s some tension with local residents who oppose more ‘homes of multiple occupancy’ dwellings near them.
Interest rates can do what they want but I can’t live in a field so I go from spending 30% of take home income in rent to paying 50% for rent, it is simply a cost that has to be borne. Or pay more in mortgage rates etc, people just find the money.
There are a couple of things that can drive up the price, and there are probably more than I list.
1. Housing crisis: in many western nations there’s a lack of affordable family houses or apartments. Shortage of supply means an increased price.
2. Inflation. Why not buy a house 25k more expensive now if it’s going to be 50k more expensive next year.
3. While the prices are still increasing, the increase probably slowed down because of the high interest rates, but didn’t quite reach a stall or decrease. A house that’s now 25k more expensive than last year might’ve been 40k more expensive than last year if the interest rates were still low.
Inflation is higher than interest rates by a significant margin. It means, that holding cash makes you loose money in real terms and most of “financial instruments” like bonds or shares can’t give you return to cover the inflation. At least not with significant risk involved.
So people are looking for places to “park” their wealth and maybe get a decent return with low risk. Real estate is at the moment the best place to do that for vast majority of people. Add to this low supply of houses and things are getting clearer.
Eli5:
*High interest rates are much lower than inflation, which makes buying a house an attractive investment.
*Demand for new homes is bigger than supply of them.
Interest rates are going up to try to slow inflation. The inflation was caused by increasing the money supply through government spending.
The impact is less people borrowing for houses. But there are still people who need (or want) housing and they are still in the market. There are less people willing to sell their houses (since they don’t want to give up their low interest rate mortgage) and a shortage in the housing supply.
As a result, those who want to buy have to spend more.
Yes, it may be true that four years ago you could get a house and pay $2,000 a month for a mortgage and now that same house will cost you $2,600 a month. But guess what? People still value having that home more than they value the money so they buy the house.
Higher interest rates often cool demand, but factors like housing supply shortages can continue to drive prices up.
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