#Newshub can reveal the Government is set to scrap grants available to help first-home buyers onto the property ladderIt comes after the Housing Minister ref...
Low interest rates mean people can borrow more. If people have access to more money but supply is limited, then prices go up. This is the supply and demand equation, but I think it’s good to test things we think we know. One issue we will find is that the US tend to sign mortgage loans with the interest rate fixed for 30 years, so interest rates changing don’t impact existing owners except when they move. Here in NZ people tend to only get a fixed rate for a year or two, and no major bank offers one past 5 years. Here’s one study “The Effect of Interest Rates and Mortgage Lending on House Prices”.
The abstract states:
We find a surprisingly important role for short-term interest rates as a driver of house prices, especially outside the United States.
The “especially outside the US” part is why I mention the difference in US mortgages vs ours.
And in the actual paper, this is part of the conclusion:
Most empirical studies assume that short-term interest rates do not influence house
price growth other than through the domestic cost of borrowing, ie by their influence
on long-term interest rates. The findings in this paper suggest that this view might
be mistaken: changes in short-term interest rates seem to have a strong and
persistent impact on house price growth
Here’s another that takes it a step further and says that purchasing power is the real driver, rather than interest rates in and of themselves.
Real income and the real interest rate have been widely considered as two important determinants of house prices. We find that the purchasing power for housing, which is based on the net present value of future income flows, is a more powerful concept. It is intuitive and realistic in nature for first time buyers who need substantial mortgage-financing. Based on aggregated yearly time series data for Belgium from 1973 to 2009, we find that nominal house prices are cointegrated with the purchasing power for housing.
AFIK the US has very long mortgage terms. It’s routine to get a 30 year mortgage with locked in terms. Of course people can and do refinance but if they have good terms they can keep them until the house is paid off.
Our mortgages are only a couple of years or so.
That’s a huge difference INMHO and can’t really be compared.
I mean, that’s pretty much what that first study says. The international markets they studied had big impacts on house prices from interest rate changes. There was less of an effect in the US, but still a lot more than they expected.
A Google search on it pulls up a couple of studies, one from Germany, one from Australia appearing to show opposite results lol (also some commentary from the NZ Treasury, but not backed up from a quick scroll). It’d be interesting to know if someone’s evaluated our ones.
So I guess it goes to my earlier point about feeling mixed about it. I’d suspect they have a far greater equalising effect when the market isnt so constrained that the subsidies can just can be capitalised into prices, so it might depend on the broader market a bit. And so pairing them with a massive state house building programme and allowing density with good public transport should go alongside. You know, all the stuff this government has cancelled, cut or rolled back ;)
The interest rates affecting house pricing is because lower interest rates increase demand. Solving the house price issue doesn’t mean keeping interest rates high, it can be influenced on the other side, supply. Which is what you’ve mentioned, the government could build state housing to increase supply of warm dry houses, and this could be a driver of lower prices if done right.
I also feel the need to point out that house prices falling is good for almost all owner occupiers, even though it’s unintuative. And since you have to pay off the same million dollar mortgage regardless of if house prices go up or down, we definitely come into the territory of that trolley problem meme with the trolley flattening a bunch of people and then saying it’s unfair to those people if we stop the trolley now before it squashes the next group - even though whether it stops or not has no impact on the ones already squashed.
I would need to see some peer reviewed study on it. You know the old saying. For every economist there exists an equal and opposite economist.
Low interest rates mean people can borrow more. If people have access to more money but supply is limited, then prices go up. This is the supply and demand equation, but I think it’s good to test things we think we know. One issue we will find is that the US tend to sign mortgage loans with the interest rate fixed for 30 years, so interest rates changing don’t impact existing owners except when they move. Here in NZ people tend to only get a fixed rate for a year or two, and no major bank offers one past 5 years. Here’s one study “The Effect of Interest Rates and Mortgage Lending on House Prices”.
The abstract states:
The “especially outside the US” part is why I mention the difference in US mortgages vs ours.
And in the actual paper, this is part of the conclusion:
Here’s another that takes it a step further and says that purchasing power is the real driver, rather than interest rates in and of themselves.
AFIK the US has very long mortgage terms. It’s routine to get a 30 year mortgage with locked in terms. Of course people can and do refinance but if they have good terms they can keep them until the house is paid off.
Our mortgages are only a couple of years or so.
That’s a huge difference INMHO and can’t really be compared.
I mean, that’s pretty much what that first study says. The international markets they studied had big impacts on house prices from interest rate changes. There was less of an effect in the US, but still a lot more than they expected.
A Google search on it pulls up a couple of studies, one from Germany, one from Australia appearing to show opposite results lol (also some commentary from the NZ Treasury, but not backed up from a quick scroll). It’d be interesting to know if someone’s evaluated our ones.
https://www.google.com/search?q=buyer subsidies house prices effect study
So I guess it goes to my earlier point about feeling mixed about it. I’d suspect they have a far greater equalising effect when the market isnt so constrained that the subsidies can just can be capitalised into prices, so it might depend on the broader market a bit. And so pairing them with a massive state house building programme and allowing density with good public transport should go alongside. You know, all the stuff this government has cancelled, cut or rolled back ;)
The interest rates affecting house pricing is because lower interest rates increase demand. Solving the house price issue doesn’t mean keeping interest rates high, it can be influenced on the other side, supply. Which is what you’ve mentioned, the government could build state housing to increase supply of warm dry houses, and this could be a driver of lower prices if done right.
I also feel the need to point out that house prices falling is good for almost all owner occupiers, even though it’s unintuative. And since you have to pay off the same million dollar mortgage regardless of if house prices go up or down, we definitely come into the territory of that trolley problem meme with the trolley flattening a bunch of people and then saying it’s unfair to those people if we stop the trolley now before it squashes the next group - even though whether it stops or not has no impact on the ones already squashed.