To get a little deeper into this problem, I'd like to look at the price sensitivity to interest rates. One could argue that, when rates are low, prices tend to respond to a rate change more than when rates are high. So, let's test this hypothesis with the data.

Below I've plotted the price sensitivity to interest rates against the value of the interest rate.

Here's how I obtained these points. Let's take a closer look at the point in red , which is again for the year 1999-2000. To get the sensitivity of price to interest rate changes, I took the change in the price from year to year and divided by the change in interest rate for the corresponding year. So, for our point, the change in real estate prices was a $70,000 rise, divided by a 1.4% rise in rates. This gives a sensitivity of $48,814 price increase per % interest rate increase. In other words, it's how much prices moved that year per one point interest rate move. That year prices went up, and interest rates went up, so this produces a positive sensitivity to interest rates. At the beginning of 2000, interest rates were at 8.2%, so this is the horizontal value for the red point.

I should also point out that the two very high points and the two very low points correspond to years when interest rates changed very little, so when you divide by a small number, you get a rather large number.

So, what do we see in this graph? We said that prices could be more sensitive to interest rate changes when rates were low. This we don't see. This is what we set out to look at on this page.

In fact, if we believe that rising interest rates correspond with lowering prices, and lowering interest rates with rising prices, all the points in the above graph should be negative! This we also don't see.

Again I am rather disappointed that we don't see some sort of sensitivity to interest rates. One would think that the market becomes more sensitive to interest rate changes at lower rate values. For example, if rates go from 4% to 5%, that's a 25% change, but if rates go from 10% to 11%, that's only a 10% change. But, we don't see this in the data.

So, what can we conclude?

Previous 1  2   3  4  Next   Printable