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Is Hpi Always Driven By Changes In Interest Rates

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Guest Riser

I have been trying to work out the relationship between changes in interest rates and annual HPI based on Nationwide data

Analysing the data it would appear there ia a lag of 10 months between IR changes and annual HPI this could be related to the fact that we are considering annualised changes.

The chart uses % interest rate changes compared to the figure one year earlier, the interest rate change has been inverted (*-1) so a direct comparison between changes in HPI and changes in Interest rates can be seen.

What does the chart show:

1. Interest rate changes appear to be the primary driver for HPI there is a direct link between HPI and interest rate changes although it would appear once a crash has started even a significant cut in rates can't stop it.

2. The last couple of crashes appear to have been triggered by a rapid increase in interest rates. This time around it just seems to have run out of steam due to affordability.

3. The reduction of average interest rates from around 10% to below 5% is responsible for the size of todays bubble

4. With such low rates and high public sensitivity to debt, even spall 0.25% rate changes represent a significant % change in rates.

EDIT

5. It would appear todays housing market reacts much faster (9 months) to changes in interest rates that it did in the past (>12 months). This could be due to higher public understanding of its impact or hightened concern over its impact on the amount to be repaid

I will leave the rest for you guys to comment.

InterestRateHPI.gif Interest rates have clear impact on HPI

post-1619-1133732441_thumb.jpg

Edited by Riser

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Guest wrongmove

1. Interest rate changes appear to be the primary driver for HPI there is a direct link between HPI and interest rate changes although it would appear once a crash has started even a significant cut in rates can't stop it.

2. The last couple of crashes appear to have been triggered by a rapid increase in interest rates. This time around it just seems to have run out of steam due to affordability.

3. The reduction of average interest rates from around 10% to below 5% is responsible for the size of todays bubble

4. With such low rates and high public sensitivity to debt, even spall 0.25% rate changes represent a significant % change in rates.

I also believe that IRs are the main factor. The old 3.5x rule of thumb was only valid when IRs were much higher that today. Just looking at the price/earnings ratio totally ignores the monthly cost of ownership, and is flawed, IMHO.

Of course, if IRs shoot up, then house prices will come tumbling down.

But if they don't, then I don't believe we will see significant nominal falls. :(

Affordability, in terms of mortgage payments, is much better now than the last crash:

late 80's, P/E = 5x, IRs = 12%

now, P/E = 6x, IRs = 4.5 %

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Nearly. Low interest rates lead to an increase in money supply (as rates fall you need to take more risk to generate any real return) so banks seek to lend money to anyone or anything.

Once this starts going pearshaped and the increase in the money supply becomes obvious interest rates rise (firstly to compensate for the bad debts see recent Barclaycard statements, then BoE rates to try and tighten money supply).

House prices are the money sink of anglo saxon economies. Any and all additional money supply will end up in house prices.

One change you haven't mentioned is that last boom mortgages were written and owned by banks. Now they are written by banks and packaged and sold as a bulk security in the City. This has allowed Banks to be far more risk friendly then they would have been if it was their own money (note that its the banks that securities most of their loans that allow the large mulitplies). This means that there was far more money available for mortgages during this boom then in the past, as loans become riskier I think mortgages will become far harder to get then they have been for a very long time.

Edited by eek

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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