3 Reasons Low Interest rates are Fuelling House Price Rises


For years now economists and consumers have been worried and frustrated by the lack of house price growth. With house prices reportedly rising more than 10% over the past year though and with London’s most expensive flat ever selling recently for a whopping £140 million (With no internal walls, flooring or bathroom I might add!) house price growth is suddenly becoming the problem as policy makers try and wrap their heads around what to do about it. While you may think that the cheap money made available from low interest rates might be the only reason prices are rising, actually low interest rates are also causing house prices to rise in more indirect ways. Bar the obvious contributing factor of cheap credit then, in what other ways might low interest rates be driving up house prices?

Stopping People from Moving

Since the financial crash of 2007-08, many homeowners have found themselves sitting on and enjoying some of the lowest mortgage interest rates ever known, with some paying next to no interest at all. As most fixed and tracker rate mortgages taken out during the time before the crash reverted back to an interest rate that wasn’t that much above the Bank of England base rate for the remainder of the term – often 22 or 23 years – this has meant that as long as interest rates remain low, homeowners who are benefiting from these low mortgage rates are sitting pretty. There is one problem with this though and that comes if you want to move home.

Though many of these mortgages should in theory be portable – meaning you should be able to take your nice cheap mortgage with you to a new property – often times this is not as easy as it may appear to be. If for some reason you don’t meet the criteria for porting a mortgage, you will need to find a new mortgage on a new, often more expensive rate. While these new rates will still be extremely low when you consider what you would have paid in the years before the crash, many people are unwilling or unable to stomach any rise at all in their mortgage payments, so they decide to stay put instead. This not only has the effect of stopping people from moving, it also affects those who want to buy because the lack of supply leads to house price rises.

Savers & Investors Looking for Better Returns

We all know of the effect that low interest rates have had on savers. As time has gone on and interest rates have remained low, many of these savers and investors have started to look for other investment opportunities in the hunt for better returns on their capital. With the potential for long term rental income and capital growth, property has attracted a lot of this capital, driving house prices up further. If interest rates hadn’t been kept so low for so long then many of these savers and investors would have been happy to keep their money in savings accounts and bonds instead of using them to inadvertently inflate the housing market. We also wrote a post recently about crowdfunding for property investment which allows even those with smaller amounts of capital to invest in property if they so wish.

Increasing ‘Panic’ Buying

In a situation where rates are as low as they are and where there seems to be constant talk that rates may rise in the not so distant future even despite so called forward guidance, it places huge pressure on those thinking of buying a home to buy now before rates do rise and they might not be able to afford to buy because of increased mortgage payments. This kind of situation can cause buyers to panic a little, buying a house that they may feel is too pricey just so they don’t lose the opportunity of securing a low mortgage rate. This is one reason I don’t like forward guidance as a policy, in that it gives homebuyers a perceived time limit in which they need to buy a house before rates rise, causing people to make buying decisions they might not ordinarily make and driving up house prices as a result.

Think Carefully before Buying

In this kind of unbalanced market it is wise to think very carefully before buying a house, even more so than you would ordinarily. Policy makers at the Bank of England are already warning that – even though they expect house prices to keep rising for a while yet – the current house price boom could well end in a crash, once again landing a boat load of borrowers in a negative equity trap. During such a pivotal time for the housing market then it would be wise to keep your head on and only buy what you can afford to buy, not just in the short term but in the long term if interest rates were to rise in the near future.

Have you been affected in any way by rising house prices? For good or for bad?

8 Responses to 3 Reasons Low Interest rates are Fuelling House Price Rises

  1. Interest rates have been ridiculously low in the US for years and years now. I built my home right at the end of the housing bubble here 10 years ago, and my home is STILL not valued at what I paid for it. Signs are always pointing towards a slow recovery, so maybe I’ll be at the break even point soon. 🙂

    • Adam Buller says:

      So I guess house price inflation is working in your favor then hey Brock. It does make you wonder what will happen to prices when rates eventually rise though doesn’t it.

  2. My in-laws just purchased a two condo and I don’t think it’s a wise decision. They just made an impulse buy without even planning.

  3. I always find the housing stats interesting, Adam. It’s amazing to me how quickly house values can go up and down. We are hating having our mortgage, but very lucky that the rate is 3.5 percent fixed. That helps the pocketbook. 🙂

  4. The housing market in the U.S. has been topsy turvy, too. We bought at the height of the housing market here and our place only appreciated to our purchase price within the last year. We lucked out by buying a place worth much less than we could afford. We’ve made significant early payments and plan to refi soon for a lower rate and long-term savings. Our advice to anyone is to buy below your means. For us, it has made all the difference in more ways than one.

  5. Soti Coker says:

    Great article. The panic buying property season is well and truly underway. A friend of mine has a flat in London she shares with her husband and child. she recently spoke of wanting to buy a four-bedroom because she wants a 2nd child and now is a good time to buy. How can this possible be a good time to buy ? Record low interest rates and rising valuations is not an ideal scenario to take the plunge in my opinion. I believe that as you mentioned Adam, she has one eye on interest rates and is worried that she will not be able to afford the house she wants in the future. All the more reason to buy “below your means” i’d say, like John Schneider mentioned.

  6. Are property is still valued below what we paid for it. But it has started moving in the upward direction again. If anything, a rise in housing value may push us to move in the next year or two, which we were already considering anyway.

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