Global house prices: are they about to plummet?

House prices: Global house prices are they about to plummet - at Moneyweek.co.uk - the best of the week's international financial media.

The Economist recently looked at house-price indicators for 16 developed economies. Their conclusion was that prices are now at "record levels in relation to average wages and rents" in America, Australia, Britain, Ireland, the Netherlands, New Zealand and Spain", and "frothy" in China, South Africa and Dubai. Not only that, but even in traditionally sober markets, like those in France and Italy (where home ownership is not considered the be-all-and-end-all of life, as it is here), prices have risen at double-digit speeds in the past year as well. So what's made this extraordinary and co-ordinated move happen? The answer is simple: super-low interest rates.

As the Economist also noted, "the average short-term interest rate in the G7 economies is at its lowest in recorded history". And low rates mean high house prices. This is because so many house buyers care only about what it will cost per month to service the debt; as falling rates mean falling interest payments they'll buy more expensive houses. But when everyone does this, the result is merely that all house prices rise. Simply put, if rates halve, house prices double.

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