Monday, April 21, 2014
Rising Home Prices In UK and Secular Stagnation
Secular stagnation is a global concept. Interest rates are kept low to encourage growth, but low interest rates decrease the monthly cost of a mortgage. Consequently, home prices are rising faster than wages or rents in London. When prices rise faster than fundamentals, we have an asset bubble in housing. Since people expect that housing prices will continue to rise, housing becomes a more attractive than other assets. This accelerates the bubble in housing. Eventually other asset prices will inflate and we can't raise interest rates without affecting growth in the real economy.