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Mortgage Rates Jump. Will House Prices Fall?

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This looks at the US markets but it basically says house prices rise when IRs go up.


Two things:

1. They are talking about 30 year fixed rate mortgages. A rise will not reduce affordability for those who have already bought.

So no rise in forced sales would be caused. But it would in the UK at present, where 66% are on variable rates.

2. Their graph shows a huge slowdown in HPI when rates go up a lot around 1980, from 15% to about 2.5%.

We are currently at or below 0% HPI (UK), so this would imply falls of of 10% - 15% under a similar scenario.


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Wouldn't it also be fair to say the effect is much bigger here, as US mortgages form a much lower proportion of the overall cost of home ownership due to their property taxes?

The property taxes vary by state and by assessed property value. The mortgages are mainly 25-30 year fixed capital repayments. You can get fixed 5 year interest only mortgages though depending on your status; you'd probably get one of these if you didn't intend to stay in the house that long. The mortgage interest attracts tax relief, so it's not a bad debt if you're highly paid.

The long term mortgage makes sense. You know exactly how much you will pay every month. They are virtually giving houses away here at the moment, or so it seems. Perhaps it just shows how ridiculous the prices are in Britain.

If the government wanted stability in the housing market they could insist that all British mortgages were fixed for 25-30 years.....hang on that's just to sensible. No more boom and bust!

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Plastic becomes brittle when exposed to sunlight for a long period of time

The same I think will be true for the housing market, the longer low interest rates prevail the more brittle it will become.

The shepple will get used to low interest rates and spend and adjust household budgets accordingly so when rates do rise there will be cries of unfair and for the government to do something to help

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Sorry but people missing the point here. Living in the US for a while I know the mentality of people here. They are used to a 30 year fixed rate. Therefore, when they see rates rising they are encouraged to go out and buy and fix a rate now. That creates extra demand etc. etc.

Exactly. The extra demand occurs at the bottom of the rate cycle.

People tend not to think about the cost of a house but rather the debt service cost. In the US, this tends to remain fixed for 20 to 30 years. In the UK, this is much more variable. The difference in the fixed versus floating preference between the two countries probably accounts for a large part of the difference in the performance of the two markets in the last 2 years or so. The UK has a lot of catching up to do to the downside when rates rise.

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