Interest Rates and Housing Market

Interest rates are the effective cost of borrowing. In Britain, the key rate (repo rate) is used by the Bank of England Monetary Policy Committee. In the U.S., the interest rates by the Federal Reserve.

Central banks, interest rates usually set up a meeting to try to inflation targeting. In the UK inflation target is CPI = 2% + / – 1 Basically, this means that if inflation forecast is above target for the Bank will raise interest rates to riseto reduce spending in the economy and thus moderate inflationary pressures.

How interest rates affect the housing market

1. Increased mortgage payments. Raising interest rates to increase monthly payments on a variable mortgage. A quarter point on a £ 140,000 mortgage can increase the monthly payments increase by up to 30 € per month.

2. Demand for housing. Sustained rise in interest rates affect the affordability of the payment of a mortgage. Asinterest rates rise, buying a house loses its appeal, and therefore demand falls. This can lead to falling property prices. For example, in 1992, interest rates rose by 15% causing the collapse of house prices in Britain.

Why rising interest rates may not lead to falling house prices.

1. Time lags. If you have a house and a rise in mortgage interest rates, it is unlikely that you will sell your property if they are very serious. In general, a lower rise in interest rates notDemand immediately, it may take up to 18 months to occur, the full effect.

2. Trust. When confidence is high, people react to rising interest rates by continuing to spend money. This leads to a decline in savings rates and falling demand for housing not.

3. Other factors that impact on Housing Market. Interest rates are an important factor, but it depends on supply and demand fundamental analysis. If it (cause severe supply constraints, as in the United Kingdom), house prices maycontinue to rise, even if interest rates are higher.
4. Real interest rates. It is important to note that affect real interest rates, the affordability of housing. When interest rates are 10% but inflation is 9%, the real interest rate is only 1%. This means that although the rates seem too high, in practice, the actual cost of borrowing is very low.

Factors, the impact of interest on housing

5. Types of mortgages. RisingInterest rates are a major influence on the U.S. because of the high% of subprime mortgages. This means that many homeowners have a mortgage debt of a high% of their disposable income have. In other countries where mortgage lending is stricter, many homeowners were unable to obtain such adverse mortgages. For this reason, rising interest rates can make the difference between able to afford mortgage payments and default.

6. In the UK, rising house prices mean thatMore first time buyers are borrowing up to 5 or 6 times income. Therefore, mortgages account for a higher% of income.

7. It depends on the ratio of fixed versus variable mortgages. If homeowners have a fixed interest rate rise in interest rates will not have any effect, at least until they come to another fixed rate contract in 4 years to be renegotiated. In Europe, more homeowners have a fixed interest rate so that the European real estate market is less sensitivity to interest rate changes.