U.K. House-Price Gains Explained By Low Interest Rates Alone

(Bloomberg) -- The rapid gains in U.K. house prices can be explained entirely by the drop in risk-free interest rates, Bank of England research shows.

A paper by David Miles, a former rate-setter at the bank, and Victoria Monro concludes that other, often-cited reasons for real home values almost quadrupling over the past four decades -- low housing supply, financial deregulation or bubble-like behavior -- play little to no role. The risk-free rate is the inflation-adjusted yield on loans that are guaranteed to be repaid, such as government bonds.

“The rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk-free interest rate observed over the period,” the researchers wrote. “Changes in the risk-free real rate are a crucial driver of changes in house prices.”

There’s also a flip side to the findings if interest rates start to rise, they said.

“The model predicts that a 1% sustained increase in index-linked gilt yields could ultimately (ie in the long run) result in a fall in real house prices of just under 20%,” the paper said.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Andrew Atkinson, Lucy Meakin

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