# House Prices & Bond Yields?



## 24601 (5 May 2021)

Chris Johns and Jim Power were discussing the relationship between house prices and bond yields on a recent episode of their podcast, The Other Hand. Johns was making the point that house prices will continue to rise - or at least not fall - until such time as bond yields begin to rise, and that this will be the case regardless of what policies the government pursue in increasing housing supply. They didn't really go into this in a lot of detail but it struck me as a point that goes largely unaddressed in the media or by government when discussing housing policy. The general consensus seems to be that more supply equals lower house prices, but is it the case that  prices will continue to rise as long as bond yields remain low? Is there any research, articles or books anyone would recommend to gain a better understanding of this relationship?


----------



## RedOnion (5 May 2021)

I haven't listened to the podcast, but there's a fairly simple concept behind it.

Take private buyers;
When I'm buying a house, assuming I'm not a cash buyer, the constraint on how much I can pay for a house is what my monthly mortgage payments will be. Lower interest rates mean lower repayments. Therefore for the same monthly repayment amount, I can borrow more. 

When it gets to investments, in theory the value of any asset is the present value of its future cash flows. I discount the future rent income based on interest rates - the lower the interest rate, the more valuable rental income in 10 years is today. Investors are currently happy with a 7% gross yield because interest rates (either borrowing costs or opportunity cost of money) are so low. If interest rates increase, but rent stays stable, then the present value of investment property falls to reflect the higher yields required.

There's definitely sone international research on it, particularly on commercial property prices. I'll see if I can find it later.

There is such a shortage of supply here that it would take a material increase in supply to change the dial.


----------



## NoRegretsCoyote (5 May 2021)

24601 said:


> Chris Johns and Jim Power were discussing the relationship between house prices and bond yields on a recent episode of their podcast, The Other Hand. Johns was making the point that house prices will continue to rise - or at least not fall - until such time as bond yields begin to rise, and that this will be the case regardless of what policies the government pursue in increasing housing supply.



The commentary on housing is 99% about supply. But demand is relevant too. People rarely point out that retail interest rates have fallen by about a hundred basis points over the last five years. For the same income you can simply borrow more. Central Bank caps limit this a bit, but not fully, as many borrowers aren't anywhere near the limits.


Supply is still of course the most important. If 200k houses appeared on the landscape overnight you would see a fall in the price of houses no matter what was going on with interest rates.


----------



## jim (5 May 2021)

RedOnion said:


> When I'm buying a house, assuming I'm not a cash buyer, the constraint on how much I can pay for a house is what my monthly mortgage payments will be


I dont think this statement is correct. An individuals borrowing is contrained based on affordibility which comes down to savings and income including stability of that income.


----------



## RedOnion (5 May 2021)

jim said:


> I dont think this statement is correct. An individuals borrowing is contrained based on affordibility which comes down to savings and income including stability of that income.


Jim,
Since you're adding value, can you explain to the uneducated how affordability as you've described it, and mortgage payments are not interconnected, in the context of my post?


----------



## jim (5 May 2021)

The constraint on how much you can pay for a house is not, as you put it, your monthly repayments. That makes no sense. The contraint is how much you can afford to borrow. Your monthly repayments are just a function of the amount you actually borrowed.


----------



## RedOnion (5 May 2021)

@jim,
The original question was about how there is a relationship between interest rates and house prices.  In a few moments I had earlier, I provided a simplified version of the theory behind it.  The fact is that there is a relationship between house prices and interest rates, _ceteris paribus_.

Do you have anything to add to explain the relationship, other than nitpicking the quick version of how I have explained the relationship?  I'd love to see your explanation of it!

I could get into details about how for the majority of those buying property with a mortgage, the affordability of their monthly repayment is actually the limiting factor to how much they can borrow, but I'm guessing you don't want to discuss facts here?


----------



## jim (6 May 2021)

Look it was a valid call out by me @RedOnion . Its ok to accept that part of your post may have been a bit confusing. I dont have anything further that I want to add at this stage. Thanks.


----------



## Purple (7 May 2021)

RedOnion said:


> I haven't listened to the podcast, but there's a fairly simple concept behind it.
> 
> Take private buyers;
> When I'm buying a house, assuming I'm not a cash buyer, the constraint on how much I can pay for a house is what my monthly mortgage payments will be. Lower interest rates mean lower repayments. Therefore for the same monthly repayment amount, I can borrow more.
> ...


Given the amount of cash floating around internationally and the low returns on bonds there is really very little point in trying to block investment funds from bulk buying homes as the cash will just find the investment another way. Any amount of supply side stimulus will just be swamped by that investor demand. Therefore State funded schemes won't solve the problem.


----------

