Property Investment » House prices And Interest Rates

How Interest Rates Affect House Prices

The Landlord — Sun, 20 Jan 2008 18:21:54 +0000

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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How The Main House Price Indices Gather Their Data

The Landlord — Tue, 16 Oct 2007 14:11:27 +0000

Indices are statistical measures of change in the economy or financial markets. Here’s a list of the main house price indices, and how they individually retrieve their statistical data.

Land registry House Price Index

The Land Registery report quarterly and gather their data from the actual sale prices paid at completion.
Adjustment: no seasonal adjustment.

Financial Times (FT) House Price Index

The FT index weights information from the Halifax, Nationwide and Office of the Deputy Prime Minister according to their past reliability in predicting Land Registry figures. The output is smoothed to avoid the erratic month to month fluctuations observed in some other indices.
Adjustment: Mixed Adjustment

Halifax House Price Index

This index is based on approved mortgages by the Halifax Bank of Scotland on a monthly basis. The stats are updated from the previous month’s data.
Adjustment: seasonally adjusted.

Nationwide House Price Index

Like the Halifax, Nationwide also gathers their data from Mortgages they approve, also on a monthly basis.
Adjustment: seasonally adjusted.

Rightmove House Price Index

This index is compiled from the asking prices of properties as they come on the market through Rightmove’s member estate agents over the previous month. The index covers half the market.
Adjustment: no seasonal adjustment.

Seasonal Adjustments

House prices are slightly seasonal – that is, prices are higher at certain times of year irrespective of the overall trend.

Where it says “seasonally adjusted”, it implies that statistical adjustments were made to accommodate predictable fluctuations during particular times of the year.

The providers say this has to be done to iron out natural changes in prices that happen every year and don’t reflect any broader trends. In the spring and autumn, for example, a traditional increase in buyers mean prices tend to edge up, even though the overall trend may be flat or even falling. Seasonal adjustment means we aren’t misled by these factors.

To view the current average house prices from these different indices, go to my Property Statistics section.

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Experts Don’t Have A Clue About UK House Prices

The Landlord — Fri, 09 Feb 2007 15:49:24 +0000

It’s come to my attention that no one really knows whether house prices are going up or down, not even the experts. I have no qualms if someone doesn’t know the answer to a question, because that was me all through school, but there’s something distasteful about an expert just “blagging it”.

Evidently, the experts don’t have a clue because their opinions are conflicting with one another, so the question is, who are we to believe?

Examples of how “experts” opinions vary from another…

6th August 2006
Article on how after 3 consecutive months of minor rises, the market takes a knock, and prices drop in value by 0.6%.
House Prices Feel The Heat

13th November 2006
Asking prices jump by 1.3% according to the latest Asking price Index report.
House Prices Surge Toward A ‘Tipping Point’

13th November 2006
Analysts believe that UK house prices will fall by 20%. Apparently the heated market is about to cool down.
UK House Prices To Fall By 20%

8th December 2006
Halifax announce that property in the UK are still rising, making the annual change to 9.6%

19th December 2006
November saw the 13th consecutive rise in property prices. It’s the first time since March that their survey has not indicated significant growth in price (strangely enough that’s not what the other reports say).

30th January 2007
House prices rose by 0.3% in January, the slowest pace for eight months, according to the Nationwide.
UK house prices ‘start to cool’

What can we conclude from all this? No one has a fucking clue. Cheers.

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