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Is a rising Interest Rate good for some ?

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  • 05-06-2011 6:31pm
    #1
    johnnyjb
    Registered Users Posts: 366 ✭✭


    Hi ive been wondering about the implications of the pending rises in the ECB rates and what it would mean to a FTB.

    Is it a good thing, ive beeen led to believe it will drive down prices. I realise mortgage repayments would be higher but you might need less to borrow from the banks.

    (BTW im not trying to be insensitive to anyone who is struggling due to intrest rate rises)


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    #2
    Treehouse72
    Registered Users Posts: 1,003 ✭✭✭Treehouse72


    Yes, historically (and I presume in economic theory too) rising interest rates have indeed driven down house prices. The relationship is very direct: a borrower who yesterday could afford to borrow €200,000 can today only borrow €190,000. Replicate that across the entire market of buyers for €200,000 properties and suddenly those properties can't clear at that price any more.


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    #3
    The_Conductor
    Moderators, Society & Culture Moderators Posts: 32,285 Mod ✭✭✭✭The_Conductor


    Is a rising interest rate good for some?

    The answer to this- is are you borrowing or lending money?
    Increases in interest rates make it more expensive to borrow money- but those who have money- find it attracts a greater rate of return.

    Higher interest rates drive down consumer demand, by making it more expensive to borrow- which in turn creates a circle- lower tax receipts, lower government expenditure, higher borrowing costs, lower prices on the goods being borrowed against- however higher deposits demanded by lending institutions.

    Its one thing to state that higher interest rates drive down prices- in the context of property- particularly in an illiquid market with very little volume- its actually not as straight forward as this. For the law of supply and demand to work- there has to be both supply and demand- at the moment we have supply but very little demand- alongside a raft of potential sellers who are not willing to recognise the seismic shift that has happened in the market.

    So- the only sellers are reluctant sellers- who are catering to a thin market that can't get credit, who in turn are going to be asked to pay a much higher deposit by lending institutions- where are we going here? Further illiquidity in the market- the only sales being foreclosures and repossessions- and the cycle continuing.........

    When Ireland *needed* higher interest rates (from about 1998 onwards) the ECB was not willing to increase them). Now that a raft of countries *need* lower interest rates (and recognising that rates are pretty much on the floor even if we have had a token gesture by the ECB at rising rates)- the ECB boys are playing Germany's and France's drum........

    Frankly- in an Irish context- increases in interest rates could well be the final nail in the coffin for this country.........


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