Even ultra-low interest rates can’t prop up house prices 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?