In the United States, the Euro zone, Japan and the United Kingdom, the short-term intervention rates of Central Banks are today essentially zero. Never in recent economic history have global interest rates been so low for such a long period of time in most advanced economies.
This extraordinary situation naturally begs the question “why”
Traditionally, such drastically low long-term interest rates are a sure signal that financial markets expect a recession in the years ahead. This is why Central Banks are cutting interest rates, to avoid recession, drive demand and push up prices.
There are a number of financial and economic consquences for taking such action with interest rates. [Some of these are outlined clearly and intellegently in the pieces by David McWilliams and The Finacial Times below.]
We shall focus on one of the consequences.
Demand for housing will rise. It is, after all, the main capital asset that most people use. Houses will behave like assets in fixed or short supply, and rise in price.
And the cost of renting those houses will rise as well.
But as interest rates remain low, so too will mortgage rates.
So, in such a housing market, it makes more economic sense to be a home owner and not a house renter.
Given low interest rates, it also makes sense to invest in a house. You are buying an asset that you know [yes, all investments can rise and fall] will probably increase in value. Whilst in a low interest economy, savings will earn you precious little – and the stock market is always a gamble.
So, start putting savings aside for your home deposit. In todays economy, it’s a smart move.
David Mc Williams