In general, with a bit of a lag, when people can borrow more because of low interest rates, house prices shoot up. When people can borrow less, house sales plummet (people don't tend to sell when they can't get what they paid for it, so sales fall instead as people stay put - though prices will fall a bit as some people will still need to sell but buyers won't have much to choose from so they don't fall back to where they were).

Stuff had a good article on this a while back (perhaps 2 or 3 years) where they compared I think average mortgage payments based on average interest rates for average houses each year going back 20 or 30 years, and I think it was adjusted for average wages as well. But do you think I can find it? Of course not.

[–] BalpeenHammer 4 points 6 months ago (5 children)

I would need to see some peer reviewed study on it. You know the old saying. For every economist there exists an equal and opposite economist.

[–] Dave 2 points 6 months ago (2 children)

Low interest rates mean people can borrow more. If people have access to more money but supply is limited, then prices go up. This is the supply and demand equation, but I think it's good to test things we think we know. One issue we will find is that the US tend to sign mortgage loans with the interest rate fixed for 30 years, so interest rates changing don't impact existing owners except when they move. Here in NZ people tend to only get a fixed rate for a year or two, and no major bank offers one past 5 years. Here's one study "The Effect of Interest Rates and Mortgage Lending on House Prices".

The abstract states:

We find a surprisingly important role for short-term interest rates as a driver of house prices, especially outside the United States.

The "especially outside the US" part is why I mention the difference in US mortgages vs ours.

And in the actual paper, this is part of the conclusion:

Most empirical studies assume that short-term interest rates do not influence house price growth other than through the domestic cost of borrowing, ie by their influence on long-term interest rates. The findings in this paper suggest that this view might be mistaken: changes in short-term interest rates seem to have a strong and persistent impact on house price growth

Here's another that takes it a step further and says that purchasing power is the real driver, rather than interest rates in and of themselves.

Real income and the real interest rate have been widely considered as two important determinants of house prices. We find that the purchasing power for housing, which is based on the net present value of future income flows, is a more powerful concept. It is intuitive and realistic in nature for first time buyers who need substantial mortgage-financing. Based on aggregated yearly time series data for Belgium from 1973 to 2009, we find that nominal house prices are cointegrated with the purchasing power for housing.

[–] BalpeenHammer 2 points 6 months ago (1 children)

AFIK the US has very long mortgage terms. It's routine to get a 30 year mortgage with locked in terms. Of course people can and do refinance but if they have good terms they can keep them until the house is paid off.

Our mortgages are only a couple of years or so.

That's a huge difference INMHO and can't really be compared.

[–] Dave 1 points 6 months ago

I mean, that's pretty much what that first study says. The international markets they studied had big impacts on house prices from interest rate changes. There was less of an effect in the US, but still a lot more than they expected.

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