[verbify]

I used to think so too. Now I'm on the fence. High interest rates means people can borrow less, and has a dampening effect on house prices, low interest rates means people can borrow more, so house prices go up.

Our current environment of low interest rates means that borrowing is cheap - which has pushed up prices, as now people can now afford larger mortgages. This has come at the same time as a withdrawal of mortgage finance from first-time-buyers, so effectively people who have bought before can buy another house, while those who haven't can't get on 'the housing ladder'. This is according to economist Ian Mulheirn, and is very much based on the UK (although similar arguments might apply elsewhere). Supply is part of the problem, but according to him, the smallest part.

https://housingevidence.ac.uk/wp-content/uploads/2019/08/201...

[ng12]

> low interest rates means people can borrow more, so house prices go up.

Sure, but they go up by the amount of money you saved on the mortgage, the net price is the same. The amount homebuyers can afford to pay doesn't change with interest rates.

[verbify]

> The amount homebuyers can afford to pay doesn't change with interest rates.

The amount people can afford to pay doesn't change, but the cost of the house does change.

Assume a 30 year mortgage. If the interest rate is 2%, and I spend 1.5k a month on my mortgage, I can afford a mortgage of 406,000 and own the home at the end. However, if interest rates are 10%, even if I'm still earning 1.5k a month, I can only afford a mortgage of 171000 in order to pay it off by the end. You can double check my figures using this calculator - https://www.bankrate.com/uk/mortgages/mortgage-repayment-cal...

Given that deposits are usually at a minimum 10% of the house price, it's very hard for first-time buyers to gather that amount of money - while people who have purchased before can sell their existing home.

The issue the paper describes is that interest rates have gone down, so house prices have gone up, _and at the same time_ it's harder to get your first mortgage (i.e. you need a larger deposit) - which most new buyers cannot afford.

[ng12]

The error in your logic is assuming the bank is going to want the same % down payment for a 2% and a 10% mortgage.

[verbify]

A down payment is usually a percentage of the value of the house (typically 10-20%). If the house is worth more, the down payment is higher. As I said before "effectively people who have bought before can buy another house, while those who haven't can't". A higher downpayment is yet another barrier. However those who have houses already can use their existing previous equity as a downpayment and therefore can sell their home and buy another.

This underscores the view I was promoting - that interest rates play a large part in the difficulties besetting new buyers.

[notSupplied]

But it results in a higher overall level of societal leverage despite consuming the same quantity of housing.