THAT’S EXPLAINS (half) OF WHY HOUSE PRICES ARE ‘REASONABLE’
No, house prices are not a credit-fuelled bubble. Thanks to the long-run in interest rates (and rising incomes) house-prices and rents are actually a bit cheaper than you’d expect.
The source of this amazing conclusion is a Bank of England paper “UK house prices and three decades of decline in the risk‑free real interest rate” by David Miles and Victoria Monro. So this is a credentialed paper from an authoritative source. David Miles is a professor at Imperial and on the BoE ‘expert committee’. This is the credible, logical, rational voice of economic orthodoxy!
Here is the ‘money-shot’. As you can see long-term, real, gilt, risk-free interest rates have been sinking year-on-year in an almost straight line. The authors have great fun mocking the Cassandras whose forecasts of inflation and rising interest rates, especially after bouts of QE have turned out so wrong.
2. changes in real incomes, and
3. user cost—how much it costs to buy and run a home.
Miles, D (1994). ”Housing Financial Markets and the Wider Economy”. John Wiley