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?