Archives for January 2016

Do Low Rates mean Higher House Prices?

The short answer is, a little bit maybe.
In an interesting study, that I found in reference section of  the Bank of Canada’s Mortgage Securitization Report, (http://www.bankofcanada.ca/wp-content/uploads/2015/12/fsr-december2015-mordel.pdf), it was found that mortgage rates only affected prices by a negligible .45%. The report showed a very weak link between mortgage rates and prices which I thought was counter-intuitive. However there were two items that had big influences on price,  access to credit and household income. I quote from the authors conclusion on page 25,  ”

“We estimate an elasticity of house prices to interest rates that is below 10, implying that the drop in mortgage rates cannot account for the increase in house prices between 2000 and 2006. However, we do show that those credit conditions matter for the formation of prices. Our results do not support a view that credit market conditions purely respond to housing demand, but point instead to a directional effect that easier credit supply leads to an increase in house prices. ”

So easy lending policies and a good employment outlook vs low rates are bigger factors in driving house prices up. The original report is here (http://www.nber.org/papers/w17832.pdf)

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