Rising Interest Rates Make Housing More Affordable

[Wurzel Of Highbridge]

As interest rates rise, property prices fall and property becomes more affordable and less risky,

Nothing the we here do not know, but why do the masses not understand that?

[goldbug9999]

As interest rates rise, property prices fall and property becomes more affordable and less risky,

Nothing the we here do not know, but why do the masses not understand that?

Stupidity ?

[Onion Boy]

Infiltration of every aspect of our lives by the psychopathic thugs.

It's really not most people's fault they don't possess one of the bombproof personality types.

[frank rizzo]

I've read this viewpoint on here a lot but I never see it explained. How much would price need to fall and rates rise to make this true?

[Bruce Banner]

I've read this viewpoint on here a lot but I never see it explained. How much would price need to fall and rates rise to make this true?

Many people, encouraged by estate agents and mortgage brokers, will pay as much for a house as they can borrow and service the monthly payments on a mortgage. If interest rates rise they can borrow less for the same monthly payment, hence they can afford to pay less. If people can afford to pay less then prices will fall.

[“Nasty Piece of work”]

It is against the blinkered owner to see a "reduction" in the value of "their" house - greed over-takes reality.

[frank rizzo]

Many people, encouraged by estate agents and mortgage brokers, will pay as much for a house as they can borrow and service the monthly payments on a mortgage. If interest rates rise they can borrow less for the same monthly payment, hence they can afford to pay less. If people can afford to pay less then prices will fall.

But if the monthly payment remains the same, even though the price of the house is less, the overall amount repaid remains the same.

Scenario A - The house purchase requires a deposit of around 30k and a loan of £169,000 @ 3.49%. Monthly repayments of £846 with total interest repayable of £84,545 = total price paid of £283,000 over 25 years

Scenario B - The house purchase requires a deposit of around 22k and loan of £125,000 @ 6.49%. Monthly repayments of £844 with total interest repayable of £127,969 = total price paid of £275,000 over 25 years

Over 25 years a saving of about £8000 or £320 a year if the rates remained constant.

So the main benefit seems to be an easier route into home ownership for first time buyers due to lower deposits but no real long term savings?

I may be making massive errors and assumptions here but is that right? You may be able to tell that I am not a financial genius lol.

[Bruce Banner]

But if the monthly payment remains the same, even though the price of the house is less, the overall amount repaid remains the same.

Scenario A - The house purchase requires a deposit of around 30k and a loan of £169,000 @ 3.49%. Monthly repayments of £846 with total interest repayable of £84,545 = total price paid of £283,000 over 25 years

Scenario B - The house purchase requires a deposit of around 22k and loan of £125,000 @ 6.49%. Monthly repayments of £844 with total interest repayable of £127,969 = total price paid of £275,000 over 25 years

Over 25 years a saving of about £8000 or £320 a year if the rates remained constant.

So the main benefit seems to be an easier route into home ownership for first time buyers due to lower deposits but no real long term savings?

I may be making massive errors and assumptions here but is that right? You may be able to tell that I am not a financial genius lol.

If you buy a house based on the maximum monthly payment you can afford and interest rates double you will not be able to service the mortgage and the house will be repossessed. Also, because interest rates have doubled house prices will fall and the amount the lender realises for your house will, in all probability, not cover the outstanding loan, so you would owe them the balance.

Do you really think that interest rates will remain this low for the duration of a mortgage?

[simon99]

Deposits go a lot further as well, and higher rates make it easier to build up savings.

[frank rizzo]

If you buy a house based on the maximum monthly payment you can afford and interest rates double you will not be able to service the mortgage and the house will be repossessed. Also, because interest rates have doubled house prices will fall and the amount the lender realises for your house will, in all probability, not cover the outstanding loan, so you would owe them the balance.

Do you really think that interest rates will remain this low for the duration of a mortgage?

Of course I don't, I'm just trying to understand how higher rates would benefit house buyers. What would be sweet is if prices dropped and rates styed low! That even I understand!!

[simon99]

Of course I don't, I'm just trying to understand how higher rates would benefit house buyers. What would be sweet is if prices dropped and rates styed low! That even I understand!!

The point is prices are lower so your debt is much lower and more manageable, plus deposits go further, you pay less stamp duty and are less exposed to rises in interest rates. With low rates and massive mortgages it only takes a small rise in rates to finish people off.

[Executive Sadman]

If/when they do rise there will be a steadily supply of dipshits attempting to 'lock in low rates' before a crash, just as in 2006/7.

The fact that if they cannot afford higher rates it generally follows their peers cant and so demand will fall tends not to occur to them. They'll 'miss the boat' (except its not a one way voyage, rather a circle that requires constant entrants to keep afloat)

[Bruce Banner]

Of course I don't, I'm just trying to understand how higher rates would benefit house buyers. What would be sweet is if prices dropped and rates styed low! That even I understand!!

If you buy when rates are high and prices are low the situation is likely to improve for you, rather than the other way around.

I bought when rates were 9% and they peaked at 15% during the term of my mortgage. Fortunately, I hadn't overextended myself so it was no problem when the bank requested, sometimes on a monthly basis, for me to increase my standing order to them. I only reacted to requests to increase the payment and ignored any requests to reduce the payment so my mortgage was paid off ten years early.

9% to 15% is proportionally a much smaller increase that 0.5% to 5%.

Edited August 10, 2013 by Bruce Banner

[@contradevian]

There isn't a big relationship interest rates and house prices interestingly.

I can remember big rises in interest rates in the 80's and house prices still continued to rise insanely.

This Forbes article seems to bear this out:

http://www.forbes.co...me-prices-fall/

So I don't subscribe to the view that low rates are pushing up prices, though the lack of yield is feeding back by encouraging investment in BTL etc..

Edited August 10, 2013 by aSecureTenant

[Bruce Banner]

There isn't a big relationship interest rates and house prices interestingly.

I can remember big rises in interest rates in the 80's and house prices still continued to rise insanely.

This Forbes article seems to bear this out:

http://www.forbes.com/sites/billconerly/2012/12/18/when-mortgage-rates-rise-will-home-prices-fall/

I doubt that will be the case when rates rise from 0.5% to a more normal 5%.

[goldbug9999]

Of course I don't, I'm just trying to understand how higher rates would benefit house buyers. What would be sweet is if prices dropped and rates styed low! That even I understand!!

For someone with an "average" deposit/LTV then its neutral if IRs are stable.

People with small deposits/high LTVs lose out.

People with large deposits/low LTVs gain.

All buyers gain from the lowered risk of future mortgage repayment increases.

Everyone with cash savings gain.

Everyone with non-property investments gain .

The economy at large gains from investment capital being redirected to more productive sectors.

The people who lose out are downsizes and BTLers.

[Harry Monk]

Of course I don't, I'm just trying to understand how higher rates would benefit house buyers.

Many people have moved into buy-to-let because they can't get a reasonable rate of interest in bonds or ISA's etc. If interest rates rose then they would very quickly get out and sell up, a mass exodus from buy-to-let would be a huge factor in driving house prices downwards.

[thecrashingisles]

But if the monthly payment remains the same, even though the price of the house is less, the overall amount repaid remains the same.

Scenario A - The house purchase requires a deposit of around 30k and a loan of £169,000 @ 3.49%. Monthly repayments of £846 with total interest repayable of £84,545 = total price paid of £283,000 over 25 years

Scenario B - The house purchase requires a deposit of around 22k and loan of £125,000 @ 6.49%. Monthly repayments of £844 with total interest repayable of £127,969 = total price paid of £275,000 over 25 years

Over 25 years a saving of about £8000 or £320 a year if the rates remained constant.

So the main benefit seems to be an easier route into home ownership for first time buyers due to lower deposits but no real long term savings?

I may be making massive errors and assumptions here but is that right? You may be able to tell that I am not a financial genius lol.

In the scenario with higher rates any overpayment has a bigger effect.

[easy2012]

There isn't a big relationship interest rates and house prices interestingly.

I can remember big rises in interest rates in the 80's and house prices still continued to rise insanely.

This Forbes article seems to bear this out:

http://www.forbes.co...me-prices-fall/

So I don't subscribe to the view that low rates are pushing up prices, though the lack of yield is feeding back by encouraging investment in BTL etc..

Exactly, interest rate is only one of the factor (of course if they go to a high real rate like +5% above inflation) then of course everything will start to crash and at that point, people with big pot of cash can then just stop working and 'rent seeking' using the saving pot although the 'interest' obviously have to come from somewhere..

Other factors would be supply and demand, credits terms, type of people buying, earning capabilities, tax treatments, inflation expectation - and anything that affects the cash flow (in and out) of the purchase.

The only sensible way out of this is lots of building (else we are just playing musical chair) and LVT.

Edited August 10, 2013 by easy2012

[Wurzel Of Highbridge]

Many people have moved into buy-to-let because they can't get a reasonable rate of interest in bonds or ISA's etc. If interest rates rose then they would very quickly get out and sell up, a mass exodus from buy-to-let would be a huge factor in driving house prices downwards.

Not to mention all those foreigners selling their London investment properties. IMO these will be the first to sell when interest rates pick up and the stock markets (other investments) are allowed to return to fair value.

[frank rizzo]

Not to mention all those foreigners selling their London investment properties. IMO these will be the first to sell when interest rates pick up and the stock markets (other investments) are allowed to return to fair value.

Would this mean a double boom for the good folk in the capital? They all cashed in on foreign money for their overpriced right to buy properties, then buy them back at reduced rates when the foreigners bail out!

[R K]

As interest rates rise, property prices fall and property becomes more affordable and less risky,

Nothing the we here do not know, but why do the masses not understand that?

It's not true.

Fed funds rate rose 1% to 5.25% from '04 to July '07. The duration of the bubble.

You'll see the same during prior housing booms.

http://research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=FEDFUNDS&transformation=lin&scale=Left&range=Max&cosd=1954-07-01&coed=2013-06-01&line_color=%230000ff&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2013-08-10&revision_date=2013-08-10&mma=0&nd=&ost=&oet=&fml=a&fq=Monthly&fam=avg&fgst=lin

Edited August 10, 2013 by R K

[Executive Sadman]

There isn't a big relationship interest rates and house prices interestingly.

I can remember big rises in interest rates in the 80's and house prices still continued to rise insanely.

This Forbes article seems to bear this out:

http://www.forbes.co...me-prices-fall/

So I don't subscribe to the view that low rates are pushing up prices, though the lack of yield is feeding back by encouraging investment in BTL etc..

Weren't peoples wage's going up as well?

[ingermany]

The use of the word "affordable" in defining house prices is the new paradigm here.

Artificially low interest rates, easy credit, interest only repayments, and government funded deposits can make expensive houses affordable. Even if the average price is over a million by next year (bringing joy to Express readers) the houses can be made affordable, even if earnings are static. It's just a question of increasing the taxpayer subsidy as much as is necessary. I think that this is the real game changer. Interest rates and economic policy are slaved to the house price index.

For clues about what could happen next, you need to look at the student finance bill.

Telegraph; DON'T CALL THEM DEBTS

Government says (and repeated in the above article by Martin Lewis) that these loans are not actual debts, but are really a type of tax or contribution, to be paid gradually when and if earnings allow it, whilst accepting that large amounts may never be repaid. I can seriously see this being the model for future government intervention to keep house prices elevated. More mortgage debt is needed to inflate house prices. What is to stop government from supplying the finance and reclaiming some of it via tax codes? How else can they stop house prices from falling?

[Bruce Banner]

The use of the word "affordable" in defining house prices is the new paradigm here.

Artificially low interest rates, easy credit, interest only repayments, and government funded deposits can make expensive houses affordable. Even if the average price is over a million by next year (bringing joy to Express readers) the houses can be made affordable, even if earnings are static. It's just a question of increasing the taxpayer subsidy as much as is necessary. I think that this is the real game changer. Interest rates and economic policy are slaved to the house price index.

For clues about what could happen next, you need to look at the student finance bill.

Telegraph; DON'T CALL THEM DEBTS

Government says (and repeated in the above article by Martin Lewis) that these loans are not actual debts, but are really a type of tax or contribution, to be paid gradually when and if earnings allow it, whilst accepting that large amounts may never be repaid. I can seriously see this being the model for future government intervention to keep house prices elevated. More mortgage debt is needed to inflate house prices. What is to stop government from supplying the finance and reclaiming some of it via tax codes? How else can they stop house prices from falling?

Are you suggesting that house prices in the UK could be ten, or twenty, times those of other western countries, supported by the tax system?

Surely that would effectively make all houses state subsidised and sooner or later a government would be elected, with a clear majority, that removes the subsidy, lets house prices crash ninety, or ninety five percent and lays the blame squarely at the feet of previous governments.