There are a number a false myths circulating in the housing industry at the moment. Many are obviously untrue when you examine the history of the market, but are often stated as if they were natural laws.
- when interest rates rise, home prices fall - this is hardly ever true, but I hear it claimed quite often
- when sales volumes fall, home prices fall - this is hardly ever true, but certainly happened in the great crash of 2005-2009, so is fresh in our memory
Home prices fall when supply exceeds demand by a substantial margin. If supply is lower than demand then it is extremely unlikely that home prices will fall. We can find no examples in history of prices falling when demand exceeds supply.
Rising interest rates decrease demand, but they can also decrease supply if many home owners have an existing mortgage with a low rate. If supply is abundant and interest rates rise, then it is likely that home prices will fall. However it is surprisingly uncommon to find this situation in the last 70 years. This is because interest rate have tended to fall far more often than they have risen, and because supply has tended to be low far more often than it has been abundant. At the moment, interest rates are on an upward trend (although this trend has halted recently) but supply is a very long way from being abundant, Supply remains very low by historic standards, though it is slowly increasing.
Sales volumes fall when demand falls, but this tells us nothing about supply. Supply sometimes rises when sales volume falls (as in 2005-2009). If it rises enough to exceed demand then prices will fall until the balance is restored between supply and demand. Eventually lower prices will stimulate demand (as it did between 2009 and 2013). However it is often the case that demand falls without falling enough to match supply, and in this case prices continue to rise. This has been a common situation in the last 70 years and is also the situation right now.
If demand falls so much that it matches supply, then prices stabilize. We have not reached that point, but it did occur in 2014 for a short period. Demand then bounced back and has exceeded supply ever since.
If demand falls so much that it drops below supply, then price will tend to move lower. This is a relatively uncommon occurrence, but happened between 1989 and 1991, between 2006 and 2009 and for a short period between 2010 and 2011. The 1989 and 2010 declines were very mild, but the 2006-2009 decline was a true bubble bursting. This is something that tends to happen only once or twice a century, after almost everyone who remembers it has passed on. Bubbles require a suspension of disbelief that is impossible for someone who has already experienced one. In 2005 the most popular false myth was that house prices never go down.
