Thursday, December 4, 2014

Why Housing Prices Should Rise In Areas With A Fixed Supply Of Housing

Interest rates are at historically low levels in many parts of the world.  This article looks at two explanations for falling interest rates and concludes that housing prices should rise in areas where the supply of housing is relatively constant.

If the price of capital is falling as the cost of computing and networking technology responds to Moore's law, then business investment will fall.  That will decrease the demand for savings relative to the supply of savings and push interest rates lower.

Similarly if the the ratio of government borrowing to GDP declines the demand for savings will fall and interest rates will fall.

The decline in business and government demand for savings will divert savings into residential real estate in response to lower rates.  That will have two effects: it will dampen the decline in interest rates and it will cause housing prices to rise in areas where the supply of housing is relatively fixed.  That might partially explain the rapid increase in real estate prices in highly desirable locations such as London, NYC and the Bay Area.  The demand for housing is increasing faster than the supply of new housing.  It might also explain the price increases for entry level housing in highly desirable suburbs which have little room for the development of new housing.  Low interest rates increase the affordability of homes in suburbs with good schools and other amenities that would otherwise have been priced out of their market.

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