Merryn's Blog

Even ultra-low interest rates can't prop up house prices for ever

Interest rates have now remained unchanged for the longest period since the Second World War. And they haven't been this low for 340 years. But even at these record levels, they can't fend off the inevitable for ever.

Fascinating fact of the day: thanks to the MPC leaving interest rates at 0.5% for the 19th month in a row, they have now remained unchanged for the longest period since the Second World War.

But we've still got a long way to go before we break the all-time record for unchanged rates. Back in October 1939, the base rate was brought down to 2% where it stayed for just over 12 years.

Still, while we may be some way from beating that record, we are doing a pretty good job on the actual level of rates: as James Ferguson regularly points out, they haven't been this low for 340 years. Nice for borrowers, horrible for savers.

Given which, you might wonder why house prices aren't booming. Generally, the lower interest rates go, the higher house prices go (because the cheaper it is to borrow, the more we will pay). So if you halve interest rates, as James likes to point out, you should see house prices more or less double.

But they haven't. Sure, they went back up a good bit at the same time as interest rates were slashed, but that appears to have been more related to a supply crunch (a 60% fall in mortgage payments allowing people to hold out for higher prices) than a new boom in cheap credit-driven demand. And now it is pretty clear they are falling again. So much so that the Halifax house price index, just out this morning, shows that prices fell 3.6% across the nation in September.

Property consultants Carter Jonas have sent out a press release that makes a valiant attempt to make this OK. They aren't sure, they say, that this number is "consistent with what is happening in the real market". Instead, they think that while "demand has been weakened by uncertainty around employment security, the economy and the imminent spending review," if you have the "right properties at the right prices and as long as interest rates remain as low as they are, there will continue to be a market". All this, they say, makes it difficult to get a "clear reading" on the market.

I think they are being unfair on themselves. Seems to me their commentary pretty much sums up a clear reading: demand has collapsed; prices are being held up by nothing but ultra-low interest rates; you can only guarantee a sale if you've got a great house and you slash the price; and prices are down 3.6% in a month. What's the unclear bit?

Recommended

Are recession fears justified? Maybe it’s time to look on the bright side
Economy

Are recession fears justified? Maybe it’s time to look on the bright side

There's a lot to feel nervous about right now, and many people are worrying about an impending recession. But it's by no means certain, says John Step…
28 Jan 2022
No easy answers to Europe’s gas crisis
Energy

No easy answers to Europe’s gas crisis

Europe’s gas crisis is a long way from over, with some analysts thinking that gas prices could remain twice as high as normal until 2025.
28 Jan 2022
The Federal Reserve has turned inflation-fighter – how do you invest now?
US Economy

The Federal Reserve has turned inflation-fighter – how do you invest now?

The US Federal Reserve has become much more hawkish on inflation and less concerned with the markets' reaction to rising interest rates. John Stepek e…
27 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022

Most Popular

Amazon halts plans to ban UK Visa credit card payments
Personal finance

Amazon halts plans to ban UK Visa credit card payments

Amazon has said that it is to shelve its proposed ban on UK customers making payments with Visa credit cards.
17 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022