I'm conflicted a bit, but I suppose I agree with you that it's a luxury, if we agree that "not having to commute for 2 hours each way" constitutes luxury.
The population may be aging but people are working longer. And in an economy with feeble monetary velocity, entitlements to old folks has pretty high relative velocity.
Low interest rates are less about entitlements than they are about attempting to restart consumption. The problem is that low interest rates encourage dinking around with M&A activity rather than investing in productive enterprise that might employ people. This leads to high private sector debt levels, which further suppresses wages. The "winners" are just sitting on mounds of cash and having trouble finding outlets for it.
You will be amazed at what dedicated team of people could do in a year using only skype, whatsapp and basic competence.
I could see the harmful effects this could cause when used as a long-term solution. Such as the recent extended US policy since the recession. Pushing people to make purchases doesn't help them rise out of the income bracket. Is this a known factor in contributing to the income divide?
Assuming that your housing budget is a fixed fraction of your income, and assuming your income is basically stable, then as interest rates drop, you can afford to pay more for a house. Assuming that you are competing against other people in the same circumstance in an auction market, lower interest rates will tend to push up prices, while higher interest rates will depress them.
Part of the author's point seems to be that this is even more true in areas that are housing-constrained, like the Bay Area, where people push their purchasing power to the limit to buy a house that still doesn't meet their needs (space, schools, commute). As people devote more and more of their income, as a percentage, to housing, they are effectively doubling down on real estate as an investment.
From my calculations, you get a drop of 10% in house prices.
My logic: Higher interest rates -> Fewer people can afford the more expensive houses -> More competition for (interest in) lower-priced homes -> Lower-priced homes might actually see a price increase (bidding wars, etc.) while higher-end segment suffers from lack of interest/smaller pool of buyers.
We bought a smaller and cheaper house than we could afford based on that logic… :-)
Lots of strange market things happen around those caps.
Lower interest rates mean that lower-return, less productive investments may attract capital (savings) that, all else equal, would be captured by higher-return uses if interest rates were higher.
For example, suppose I run a factory that has an opportunity to invest $1MM in new machinery to increase productive efficiency, resulting in 2% higher profits. Meanwhile, you run a factory that would benefit similarly from a $1MM investment, but to the result of a 5% increase in profits (from the same level). If prevailing interest rates for investments with a similar risk profile to ours are 4%, then since 4% > 2%, there is no interest rate at which I can issue bonds (or get a bank loan) such that (a) somebody would be willing to buy those bonds in preference to other similarly risky bonds (or give me a loan in preference to other similarly risky borrowers), while at the same time (b) I would be able to make a profit by taking their cash and investing it in new machinery in my factory. The result is that my investment does not get funded–indeed, knowing that investors will demand 4% and that I can offer at most 2%, I will not even ask for their money. On the other hand, in the same macroeconomic environment you can profitably attract capital to your factory, because you can sell bonds to willing buyers at 4% and use the money to fund an investment that will gain you 5%. And so do ask for funds, and you do get funded; and others in a situation similar to yours do too, while I and others like me don't. So broadly, throughout the economy as a whole, each dollar invested results in productive growth of at least 4%, after controlling for risk.
Now imagine that the situation in our factories is the same as before, but that interest rates are only 1%. You can still issue bonds, of course, but now so can I. And if we do both issue bonds, the result is that the average economic return on investment is lower: my 2% productive gain and others like it bring down the average. If capital markets are functioning well, there's nothing wrong with that. Interest rates should be lower in the latter situation because there's more cash that people are trying to put into productive uses; the most productive uses should still most easily attract dollars, so all of the investments returning 4% that were available before should still get funded; only afterwards should the leftover cash flow to less productive investments like the one in my factory.
But in reality there are many reasons to think that broadly lower interest rates might result in capital being allocated to less productive uses at the expense of more productive ones. First, investors cannot always easily distinguish between more and less productive investments. Things usually tend to work out all right in part because borrowers only have an incentive to borrow if they believe they can profitably make use of borrowed dollars; but less productive borrowers can turn a profit at lower interest rates, so if lenders can't distinguish them from their more productive competitors for borrowed dollars, then the macroeconomic return to investment will fall as less productive investments partially crowd out more productive ones. Second, investment competes with consumption, which is unproductive by definition. People will forgo spending cash today only if they're promised so much more tomorrow that it seems worth the wait; when interest rates are low, people will spend more money today on non-productive uses (consumption) than they would if interest rates were higher.
Well-functioning capital markets should sort it all out. But it's not at all clear that we have well-functioning capital markets. Some of the potential reasons for that are well mooted; another class of reasons has to do with the fact that out capital markets are subject to massive manipulation by central bankers. Interest rates today are not extraordinarily low because lots of people are willing to forgo spending today in exchange for a pittance more tomorrow; interest rates are near zero because central banks have created a whole lot of money out of nothing, and that cash has to go somewhere. Indeed, this is a major reason that mainstream monetary theory says you should lower interest rates during a recession: by doing so, you jump-start the economy by enticing people to spend money now that they otherwise would have waited to spend until tomorrow—but that's essentially because you've made money tomorrow worth less than it would have been otherwise, not because you've made money today worth more.
So at the same time, you're also probably shrinking future economic growth. And there's not much reason to think that all these crisp, newly minted dollars are flowing to the most productive uses. Indeed, much of that money (by design) has gone to shoring up the balance sheets of big banks, mainly by inflating the value of government-issued bonds (thus lowering broad interest rates) and other assets—including houses.
Not really. They've been discouraged from investing in productive assets because of anemic demand - caused in turn by high income and wealth inequality.
No point in building another factory if the people who would purchase its output are stuggling to pay down student loans, rent and spending the little disposable income they do have on an iPhone.