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Comment by chenster | Hacker News Reader

> I don't know how / can't believe how in the 1980s we had the era of 15% interest rates, etc (ok, I have some idea, central bank policies, inflation, etc) -- but it seems now we're in a "forever-0%-interest" situation.

Yes, 17-20% interest rate was not unusual in 70s, 80s, but home prices were much much lower back.

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I reckon housing prices would be lower now too if interest rates were at that level. Most people care about what their monthly payment is going to be. If they're paying 20% interest the principal is going to have to be low enough to accommodate their budget. Increase rates and watch demand dry up as the monthly cost skyrockets for those financing the purchase. Prices should drop accordingly.

You're right.

Interest rates have a direct affect on property value.

Note that I do believe that this effect isn't quite as present in the "ultra-luxury" markets (or at least as a much lower impact)

I was interested in how it was possible so did a quick Excel calculation of monthly payment.

For a 100 000 USD home without a down payment, and a 10 year loan you'd pay 1738 USD per month for a total of 208 500 USD. I've used 17% yearly interest rate.

=PMT(0,17/12;10*12;100000)

Today if you used 3% interest rate, your monthly payment would be 965 USD for a total of 116 000 USD.

Buying homes on loans was insanely expensive in 70s-80s but probably the growth of prices of homes made up for it.

In practice, since people can afford to pay $1738 USD per month, they bid up the price of the same house to =FV(0.03/12;10*12;-1738) or 243 000 USD.

Ah so the problem is that the supply of houses is very limited and prices are dictated by amount average house buyer for specific house can afford. It makes sense.

This is another proof why government shouldn't intervene into the market by offering loans or subsidies. Usually what they end up doing is completely opposite of the intention. Instead of subsidizing young buyers to buy homes for less cost, they end up subsidizing the owners of the houses.

Inflation adjusted, median price in 1980 was 180k, it peaked up to 280k in 2007, then dropped back down to 190k by 2011, and has now risen back to 280k in 2020. Feels like a correction is due, but if rates stay so low, who knows.

If you think the overall market is one where supply of housing and/or land is constrained, it might be more relevant to adjust for earnings growth, not just inflation.

Alternatively, if you think for the market as a whole there are not meaningful constraints on supply of housing or land, the more relevant adjustment might be for increases in construction costs.

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