How low interest rates have contributed to the housing crisis

By Dominic Vis

There is a lack of real vision for the housing crisis from those on the right that needs to be addressed. 


One thing baby boomers often say when talking about their mortgages is that although the house prices were cheaper a few decades ago, they had to pay huge interest rates which made it more over time. This would apply especially to those who struggled to make ends meet. Although today we have higher house prices, we have lower interest rates. This typically encourages borrowing because there is less risk, however there is a hidden dark side to low interest rates that needs to be addressed.


Low interest rates mean that it is not profitable to put money in the bank. I’d say people may choose not to keep their money in the bank as inflation rates are exceeding interest rates, meaning the real value of their money is worth less over time. Therefore, people are looking for things to invest in rather than storing money in banks. Economically, this is normally good as they would invest in companies’ stocks and shares. However, many boomers who are less comfortable with the stock exchange are investing in property. Property itself has become a substitute to storing in the bank. Property will continue to be a safe option whilst people are investing in it. This is creating a housing bubble which means houses are not worth what they are being sold for; however, the price continues to rise because you aren’t buying a house anymore, you are buying a safe investment with constant dividends.


Even the 2007-2008 financial crisis that was built upon the housing market failed to crash the bubble because it caused issues for businesses. The more problems that businesses face and the less stable they are, the more stable the investments in housing. This is why the pandemic and Brexit will increase house prices rather than decrease them.


Investors have predicted the housing bubble will pop for years and they continue to do so. This is because they want people to sell and move their money into stocks rather than housing. If people do this then the investors who have money in companies get richer as the demand for stocks go up.

To pop the housing bubble, we need to make investments on housing less secure or make investment into the stock market/savings more secure and more profitable. We want to address the issue before disgruntled millennials begin to look for more extreme solutions. A time that people addressed the housing bubble historically was when the Welsh burnt the homes of English people who bought holiday homes there. This has meant that house prices in Wales have stayed low in comparison to England. However, this is a very aggressive method and encourages crime.

It is in the interest of everyone to pop this bubble because shelter and security is a huge factor when it comes to wellbeing and mental health. Failing to address this leads to people looking for more extreme solutions and people will become more uncivilised. Historically, we have seen this many times – and we all know history repeats itself. Low interest rates have caused more people to buy houses than save in the banks and contributed towards the problem.


The Conservative Government have recognised the problem and have done many things to try and address the issue, such removing any tax advantages for interest payments on a mortgage for a second property. It is also now more expensive to buy to let than to buy a second house due to extra stamp duty. We have a net positive migration in the UK and a positive birth to date rate which means a growing population. This means the problem will get worse unless we do something about it. We need more radical change before it’s too late.

Photo credit: "Estate agent signs" by Rachel H

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