Interest Rates and Property Inflation

[Ross Sneddon]

Hi

Forum members often interrogate interest rates and question the subsequent affect on property market prices. Many comments made, suggest that interest rates have a significant affect on the price of property. I have looked at this question often and I have come to the following conclusion:

There is no statistical evidence or data that shows any noteworthy correlation between interest rates and subsequent property price inflation. It simply does not exist.

I am prepared to acknowledge interest rates do have some small influence. It may be hidden in or form part of many other factors that affect property prices or it is irregular in its effects and of itself cannot be isolated. Direct correlation, No!

When I am looking for an area to invest, renovate, hold or flip etc., I seek an area that is able to show an ability to perform from historical data. Other factors, including interest rates, are of lesser importance.

A typical media story will grab hold of a report of a proposed variation in interest rates and expand and expound on the inflationary affect on house prices. But that is what it mainly is, “Media Hype”. Does it happen? I don’t know of any occasion.

Do you have any statistics?

Ross

 

[Kevmeister]

Ross:

Having recently bought the Residex Report Top 50 House/Unit prices, it contains this:

Surprisingly, there is no statistical evidence for any significant relationship between interest rates and house price inflation. This does not mean there isn't one, but if there is one, it means that the relationship is either inconsistent or is swamped by the other factors that we use in prediction.

(Thanks to Residex for disabling the text-copy option in their PDF document, by the way. Had to type that the hard way.)

So at least someone agrees with you.

 

[NigelW]

Originally posted by Ross Sneddon
Hi

Forum members often interrogate interest rates and question the subsequent affect on property market prices. Many comments made, suggest that interest rates have a significant affect on the price of property. I have looked at this question often and I have come to the following conclusion:

There is no statistical evidence or data that shows any noteworthy correlation between interest rates and subsequent property price inflation. It simply does not exist.

I am prepared to acknowledge interest rates do have some small influence. It may be hidden in or form part of many other factors that affect property prices or it is irregular in its effects and of itself cannot be isolated. Direct correlation, No!

When I am looking for an area to invest, renovate, hold or flip etc., I seek an area that is able to show an ability to perform from historical data. Other factors, including interest rates, are of lesser importance.

A typical media story will grab hold of a report of a proposed variation in interest rates and expand and expound on the inflationary affect on house prices. But that is what it mainly is, “Media Hype”. Does it happen? I don’t know of any occasion.

Do you have any statistics?

Ross

This is a really interesting question Ross. unfortunately I don't have any figures to correlate the two...just a theory

Interests rates have only an indirect impact on demand, which is the true driver of price growth. The impact of cheap money is to give people the capacity to gear more comfortably.

BUT whether they do or not is shaped more by issues such as the relative performance of alternative investments markets (ie share market) and, people being people, by what "the herd" are up to...greed and fear

ALSO I think that the impact of interest rate movements can be disguised by the delay where, as is the current situation, there is a vast number of homeowners whose repayments are a long way in front due to them keeping up payments from 2 years ago despite interest rate falls...

an imperfect and incomplete theory...but a theory nevertheless.

where are our excel cranking economists when we need them??

Hopefully Michael Croft (a real renaissance man if ever there was one) will have some views on this - I think he "read" economics on the way to becoming a reno guru

Cheeers
N.

 

[tonyd]

Kevmeister quoting Residex
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Surprisingly, there is no statistical evidence for any significant relationship between interest rates and house price inflation. This does not mean there isn't one, but if there is one, it means that the relationship is either inconsistent or is swamped by the other factors that we use in prediction.
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So if interest rates are 20% then property prices are unaffected?

Tony

 

[Kevmeister]

I guess they are intimating that. Didn't property prices boom in the late eighties when interest rates hit 15+% ? Yet this time the boom was in a low-inflation, low-interest period. I guess that's the point they are trying to make.

 

[Sim]

Exactly - there is no direct correlation between interest rates and house price growth.

When interest rates are low (often because inflation is low), finance is easier to get, and people are able to afford to spend more on mortgage repayments, thus will spend more on property, or upgrade their properties, and drive up the prices.

When interest rates are high, it often means that inflation is high, which is often as a result of more rapidly increasing property prices - which means more people might be tempted to buy into the market, and drive up the prices.

So with this example, we see two seemingly oposing views causing potentially a similar effect - albeit for differing reasons.

So I concur, there is no direct correlation between interest rates and house price growth - factors, sure, but no direct correlation.

 

[XBenX]

im sure someone posted the residex paper which was on this exact topic

search for

residex+interest+rates+correlation

and you should be fine

stats included