How did the interest rate affect the housing prices What drives Essay

How did the interest rate affect the housing prices What drives overseas investors to invest in UK housing market - Essay Example These rates determine the volume of economic activities within the different sectors of the economy Let’s take the example of housing market and understand what the impact of interest rates is over the housing market. In general perspective, the interest rates varies indirectly with housing prices. Any rise in the interest rates makes the market unattractive for the buyer buying the house and therefore demand falls which ultimately leads to falling house prices. On the other hand, any increase in interest rates will increase the monthly payments on a variable mortgage over the house Interest rates and housing prices Interest rate affects the value of income-producing real estate mostly as compared to any investment parameter/factor in the economy. Due to such greater degree of impact of interest rates on an individual's ability to purchase housing properties many people incorrectly assume that the only deciding factor in real estate valuation is the mortgage rate. However, mor tgage rates are only one interest-related factor that influence the property values In developing countries US and UK, the rising interest rates have a big impact over the housing prices. Few years ago, the world has witnessed the global economic turmoil due to the high failures in relation to sub prime mortgages. This means that many homeowners have got a mortgage by borrowing a greater portion of their disposable income The relation between interest rates and housing prices is stronger at lower real interest rates, but even at low real rates, when time trend is included, prices seem to rise by x% as interest rates fall by much lower at y% point. The most common reason with regard to rising housing prices is the availability of easy credit, which took the form of high loan-to-value ratios, low interest rates and permissive approvals. These variables certainly affect housing prices Some of the exceptions to the case i.e. cases where the rising interest rates may not cause fall in ho use prices: Due to time lags: Suppose, someone have a house but any rise in interest rates is unlikely to make him/her sell the house, unless it becomes very serious. Generally a rise in interest rates will not reduce demand straight away Due to confidence: Suppose if the confidence level over the market is high, people may continue to spend money and respond to rising interest rates. This would lead to a fall in the savings ratio while the demand for housing doesn’t fall Due to real interest rates: The affordability of housing is majorly affected by the real interest rates. Suppose, if the interest rates are 9% but the inflation is 8%, the real interest rate is only 1%. In other terms, though the interest rates seem high, but in practices the real cost of borrowing is low Due to Other factors: Many a times, it depends on basic supply and demand analysis as well. Suppose, if there are severe supply constraints (like in the Great Britain) house prices may continue to rise, eve n though interest rates are higher Many a times some of the small developers and second-hand house owners may first reduce housing prices: Any increase in the down payment for the first house would also lead to increase in bank interest rates. This would lead to rise in the down payment pressure and interest costs on buyers Interest rates and impact on capital flows over housing market Since interest rates affects the capital flows, the demand and the supply for capital and investors' required rates of ROI,