How Interest Rates Affect House Prices

It’s said that the last housing crash in the UK, 1990-1995, was due to two main factors- low employment and record high interest rates. If people aren’t employed and interest rates are high, how will people buy houses or pay their mortgage? They can’t.

I was specifically interested in how the Bank of England Base rate affects the national stats for housing prices. I’m sure there are loads of other complicated factors that affect house prices, but I think it’s fair to say that interest rates is one of the heavyweight contender’s. Why? Because interest rates determine how much money we will have to spend on a monthly basis on our mortgage.

I’ve plotted two sets of data into one graph to view the correlations. The red line is showing the Bank Of England base rate from 1985-2007 and the yellow line is showing the average house price in the UK, 1985-2007, according to Nationwide, one of the Uk’s leading mortgage lenders. Nationwide get their data from the amount of mortgages they approve.

The lines are pretty symmetrical, showing that when interest rates are high, house prices drop and vice versa. If interest rates shot up to 15% in the current market, as they did in 1990, would house prices drop? I believe so. People are struggling to pay mortgages now, with a rate of 5.5%, let alone 15%. Funny thing is, people think that interest rates are high at the moment.

Anyways, are the results surprising? Not really. But you know, it’s good to see the proof with your own eyes. I tried looking for a similar graph, but Google failed to deliver. Or perhaps I’m just bad at Google.

You can see the raw data for this graph here, Nationwide Average House Prices Vs Base Rate.

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john wrote, on Jan 24th, 2008

	Hello, does this graph include chaning value of money in time. I’m curious about rapid increase of average price since Jan 2002, the fact of strong corellation between interest rate and average price seems obvious… by the way fantastic site keep on
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The Property Amateur wrote, on Jan 24th, 2008

	Hey John, Many thanks for the comment. Unfortunately the graph doesn’t directly show how the value has changed in money. I’d probably need a line showing average salaries in the graph to get a good idea of that. I’ll see if I can get a hold of that data. The purpose of the graph was merely to show me what the correlation between interest rates and house prices looks like, as opposed to show how much the value of houses have increased by. As you said, the results are pretty obvious, but I just wanted to see for myself how much of a correlation there is. It’s a lot clearer through a graph
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