Will the Increase in Interest Rates decrease demand?

[SteelBlue05]

After the announcement of an increase in interest rates (0.25% in Dec and another 0.25% in the Spring and probably more later in 2006) do you think we will see a decrease in demand and therefore a decrease in house prices?

If I remember right from Economics classes the ability to buy will be decreased by the increase in rates and therefore you would expect a decrease in demand and decrease in prices (or a slower rate of increase in price).

Or does it matter as people will just soak up the increase and pay up for a more expensive mortgage?

 

[Reggie]

Is the increase not 0.25 in December and another 0.25 in March? 0.5 in total.

 

[SteelBlue05]

Is the increase not 0.25 in December and another 0.25 in March? 0.5 in total.

Yes, sorry it is. But its likely there will be another .25% towards the mid\end of 2006. Well thats what I read somewhere but its not for sure.

 

[hmmm]

Classic economic theory would say that an increase in interest rates (cost) should lower demand, and this appears to have happened in the UK. I wouldn't be surprised though to see an avalanche of positive press about house prices from the usual suspects if any increases are announced. Cue the "it's only .25%, we still expect house prices to increase by 5760% in the next 10 years" press releases.

 

[SteelBlue05]

But I am not sure what happened in the UK will apply here. Theres an unusual situation with the Dublin market where you have such a high population (and an ever increasing one) and a small area so I have a feeling demand is just too high to be affected by a .25% or even a 1% increase in rates.

If the economy goes belly up and rates stay high then we'll have the decrease in prices. But while the economy remains strong and while there are so many people living in Dublin I cant see Dublin prices actually decreasing.

 

[CoffeeBrew]

It will certainly decrease affordability.

The banks have been pushing affordability as their prime indicator of housing market health. This was convenient for a couple of reasons:

1. Interest rates are exceptionally and historically low

2. House price to Income ratios have become so extreme in ireland that the banks would prefer we don't pay too much attention to them

However it now looks like even affordability ratios are ringing alarm bells and they will get worse next year as interest rates climb.

 

[JaneyL]

Is this a matter of fact ? Have the ECB come out and stated that this is their intention, or is it just idle speculation and scaremongering ?

 

[dam099]

Is this a matter of fact ? Have the ECB come out and stated that this is their intention, or is it just idle speculation and scaremongering ?

It is speculation at this point though Trichet did apparently hint very strongly at a .25% increase next month. Anything else is reading tealeaves.

 

[sun_sparks]

Apparently (if you believe the news this morning), Trichet has promised a .25% rise next month, but he has said it will be a once-off and ruled out more successive rises following this.

 

[gearoidmm]

I don't think he has ruled out further rate increases. Rather, he said that he will not go on a monthly rate-raising cycle like the Fed has over the past two years. Other central bank members have said that the natural rate level for the ECB should be 3% and figure that there may be a gradual rise to that level over the next year/18 months.

 

[Joe Nonety]

Most people including "financial experts" are about as likely to accurately predict when interest rates will change as they are of predicting Roy Keane's next club.

 

[CoffeeBrew]

Is this a matter of fact ? Have the ECB come out and stated that this is their intention, or is it just idle speculation and scaremongering ?

As far as I know, Dan McLaughlin's latest forecast predicts rates will rise to 3% by the end of 2006.

Are you suggesting that the Chief Economist of the Bank of Ireland engages in idle speculation and scaremongering ?

I guess I'm in good company then

 

[etel]

Dan McLaughlin's latest forecast

haaH ha ha Hahhhh haaaaaaaa ha ha ah aha haaaahh ha ha

predicts rates will rise to 3% by the end of 2006.

Oh ** ** , I agree with Dan.

3% base onto a typical 200K mortgage over 25 years means 4.3% variable, another €120 a month non ?????. That will make a difference but .25 % won't really .