Monday 17 January 2011

Fun Online Polls: a nice lie-in and the effect of interest rate rises

Thanks to everybody who took part in last week's Fun Online Poll:

Having a nice lie-in at the weekend means staying in bed until about...
8.00 am - 12%
9.00 am - 21%
10.00 am - 27%
11.00 am - 21%
12.00 noon or later - 13%
Other, please specify - 7%


Phew, so I'm slap bang in the middle of that range. Three commenters mentioned times between 6.30 am and 7.30 am because of cats or kids. I'm not sure that counts as a 'nice lie-in', really (but my commiserations nonetheless, and don't forget that in ten years' time you'll banging on your teenage kids' doors at midday telling them to get the f- up already).

That distribution also reminds me of Florence Nightingale's fine words: "To understand God's thoughts we must study statistics, for these are the measure of His purpose"
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And lo, to this week's Fun Online Poll.

A. It is widely accepted that house prices fall if interest rates rise, the logic being that selling prices reflect the discounted Net Present Value of the rental value; so the higher the interest/discount rate, the lower the selling price. As it happens, it is quite difficult to find a correlation in real life because there are so many other factors in play (availability of credit being far more important), but hey.

B. Conversely, there are a lot of people who insist that landlords are subject to the same basic rules as any other supplier, and that the rents they charge purely reflect their input costs plus a minimum profit margin (else they go out of business, supply falls until surviving producers can increase their prices to reflect the higher input costs); even more bizarrely, some people insist that the interest they pay is an input cost in the first place.

If this were true, then assumption A. would simply not hold - higher interest rates would lead to higher rents; and the NPV of the higher rent at a higher interest/discount rate would hardly change. Of course, the interest a landlord pays is not an 'input cost' at all, it's a cost of ownership (his expense is the bank's income, separate topic).

So what do you think? Vote here or use the widget in the sidebar. There's no 'other' option this week, as I am just looking at two out of a myriad of possible factors.

5 comments:

Bayard said...

A. I was under the impression that house prices were governed by the ability of the buyer to borrow money, therefore higher interest rates mean lower multiples of earnings available to borrow leading to lower house prices.
B. As I have said before, I am constantly amazed by the number of people that think that, throughout commerce, higher purchase prices can simply be passed on as higher sales prices.

Mark Wadsworth said...

B, re your B, in the short term certainly not, but in the long run this is what happens. e.g. price of wheat doubles (permanently); price of bread/beer goes up;
so people buy less bread/beer; some bakers/brewers go bankrupt; supply curve shifts left/up; demand curve stays the same;
new higher price equlibrium is a price at which surviving bakers/brewers can still make a profit.

James Higham said...

Someone wrote that Florrie's conception of G-d was that of a glorified sanitary inspector.

Mark Wadsworth said...

JH, I am quite sure that a benevolent omnipotent being would find time to look after public health issues.

Deniro said...

As well as mortgage costs influencing the affordabilaty of prospective offers, the average selling price of houses is
influenced by how much banks lend, and how much banks lend is influenced by the average selling price of houses, and has
the possibilty to lead to trending prices.