(Even) Lower Interest Rates vs. Weaker Economy

“It’s too soon to tell.”

–Chinese leader Mao Tse-tung, when asked — in 1948(!) — about the historical significance of the French Revolution.

To accurately assess the potential effect of Brexit on the housing market, one must first identify and analyze the biggest variables.

Here’s my take:

Positives for Housing

One.  Lower interest rates.

Central banks’ playbook ever since Long-Term Capital Management imploded in 1998 has been to respond to systemic shocks by flooding markets with liquidity.  In addition, in the aftermath of a major shock, investors predictably flock to the (perceived) safety of government bonds, driving their price up and interest rates down (they move inversely).

Lower bond yields typically translate into lower mortgage rates, albeit with a lag.

Two.  Demand for hard assets (real estate definitely qualifies) goes up when central banks go overboard printing money (see also, “gold”).  Call that the flip side of central bank intervention.

Negatives for Housing

One. “Wealth effect” in reverse:  shrinking portfolios makes investors-cum-homeowners poorer, more risk averse.

Two.  A potentially weaker economy due to contracting global trade.

If so, that means higher unemployment, slower wage growth, etc., which hurt consumers’ purchasing power and housing affordability.

Bottom line?

Long-term, the Brexit risks appear to predominate to the downside.

However, short-term, lower interest rates may actually stimulate housing.

See also, “Brexit’s and Black Swans.”

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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