The interest rate conundrum – a problem in search of a solution

It is quite common for commentators now to support a reduction in interest rates on the ground that this would result in lower mortgage rates.  This analysis is correct, yet changes in interest rates have other impacts on house values.

 

Low interest rates push up house prices.  In a report under the Bank Underground auspices, Miles and Munro state that “…Between 1985 and 2018… we estimate that the long-run effect of the decline in the risk-free rate increased real house prices by about 108%; the increase in household income increased house prices by around 80%; whilst the increased net tax obligations pushed house prices down by around 15%.”

[Miles, D., and Monro, V., 13 January 2020, ‘ What’s been driving long-run house price growth in the UK?’, Bank Underground.]

 

Other evidence is that “According to the housing ministry’s guidance, a two-percentage-point fall in interest rates pushes house prices … [up] by six percentage points.”  [Economist, 10th August 2024].

 

Is there an answer?

Supply side supporters would assert that building more houses is the answer, but apart from not requiring lots of extra house building, the effect on house prices would be negligible, easily offset by the lower interest rats and increases in earnings.

 

So what are the options?

Restricting access to the market for those with more resources (income or assets).

Cutting demand for non-permanent use of housing (second homes, holiday lets).

Changing planning rules to restrict developers from building luxury properties.

Increasing the share of affordable properties.

Taxing increases in house values (above inflation levels), at point of sale.

 

A steady state housing market would be desirable but is it feasible?