Interst Rate Effect on Housing

interst rate effect on housing market.

The effects of interest rates upon the housing market

Interest rates represent a remuneration of the loaned capital used for a determined period of time which is expressed in a quota percentage of the total amount of the money landed. In other words, the interest rate determines the amount of money, aside from the initial credit, paid by the debtor to the loan lender in exchange for the financial resources borrowed.

Interest rates have a great impact upon the economic and social sector as their sizes directly influences the overall level of credits granted by the banking institutions towards the production, education, medical or military systems.

Effects on housing market rather reduced percentage of the large population possesses sufficient financial resources to acquire a house on their own. Most individuals need to address banks with a credit request. The level of the interest rates promoted by the banking institutions on the financial market sets certain behavior trends amongst immobile consumers.

In this order of ideas, when the interest rate is low or tends to decrease, consumers perceive it as an opportunity to decrease their personal costs of immobile purchasing. Therefore, the credit demand is prone to increase significantly, whereas the credit supply is prone to decrease. Being able to pay lower interest rates for their equity loans, the public will feel encouraged to invest more in immobile values, leading to an increased demand on the housing market.

In this context, housing involves not only the sole acquisition of a house, but it also includes house related expenses such as furnishing, decorating and redecorating wiring, installing of heating systems or append purchase.

A rather high and increasing interest rate is perceived by the general public as a factor that increases their personal expenses regarding housing investments. The credit demand on the market will most likely decrease, whereas the supply for credits on real estates offered by banking institutions will increase significantly. These high costs will lead to a considerable decrease in the amount of investments in the housing market and will decrease the demand for real estate.

3. Elasticity of interest rates

The elasticity denotes whether or not the interest rate curve can be moved from a point to another and adjusted to the market requests based on the demand and supply for housing loans. The elasticity of the interest rate has been widely discussed by specialized economists, their opinions on the subject varying. In 1998, economists Robert Bliss and David Smith concluded that "the elasticity of interest rate volatility, the coefficient linking interest rate volatility to interest rate levels, is 1.5.." Furthermore, in regard with the highly elastic interest rates and low elastic interest rates, the two economists stated that "a moderately elastic interest rate process can capture the dependence of volatility on the level of interest rates, while highly elastic models cannot."