How are average house prices in most Western countries rising, even while interest rates are increasing?

Question

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

Answer 1

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.