FreshBricks

Do low interest rates make houses affordable?

The government encourages people to buy new homes because of the low interest rates offered by your local bank but does it really work that way? To start, let’s look at a basic tenet in Economics: Supply and Demand. The rule states that:

High supply = low demand = low prices
Low supply = high demand = high prices

So we are living in a time that interest rates are on record low but what does it imply?
It implies that more and more people would be qualified in taking out a bank loan for the payment of their own house. This movement will ideally increase the demand for properties. As what is stated above, high demand equals high prices. This happens because the inventory of properties decreases and people are fighting over the low supply. Inversely when the interest rates are high, few will be able to qualify for a loan, this greatly diminishes the demand. The tables have turned on this one as the properties now are on over supply and they will compete with each other thus diminishing their prices in the process.

Before you jump in

Let us think of this thought: Homeowners who have a mortgage at say 6% would refinance their homes to a lower rate. Most people would consider refinancing so that they would pay less monthly amortizations but it does not affect the actual inventory of properties on sale.

So what matters? Most of us are not actual investors in real estate? What counts in the numbers are those who will purchase a new home, either as a first time homeowner or those who have just a lot on their hands to buy a property for their convenience or for investment. What does that mean further? It means that the market today is still acquiring enough force to shoot the prices up.

Consider also that when interest rates are high, it will directly affect the Rent vs. Buy decision of homeowners.