You need to look at the rent for the cost of housing. That’s what goes into inflation. House prices are high because inflation is low. Or more correctly, they are high because interest rates are low, which is because inflation is low.
Imagine you have a rock-solid investment opportunity. You are sure, it will generate a return of 10k until the next year. Say you can borrow money for 5%pa. If you borrow and invest 100k, you get 110k back and have to pay 105k back, for a profit of GBP 5k. But if everyone thinks the same, they are not just going to let you have free money. If they can’t adjust the payout, they will adjust the price. So, at that rate of interest, the price has to be 200k for that 10k opportunity.
The point is that if rents are constant while interest rates go down, then the cost of buying must go up.
You need to look at the rent for the cost of housing. That’s what goes into inflation. House prices are high because inflation is low. Or more correctly, they are high because interest rates are low, which is because inflation is low.
Imagine you have a rock-solid investment opportunity. You are sure, it will generate a return of 10k until the next year. Say you can borrow money for 5%pa. If you borrow and invest 100k, you get 110k back and have to pay 105k back, for a profit of GBP 5k. But if everyone thinks the same, they are not just going to let you have free money. If they can’t adjust the payout, they will adjust the price. So, at that rate of interest, the price has to be 200k for that 10k opportunity.
The point is that if rents are constant while interest rates go down, then the cost of buying must go up.