Interest Rate Spreads and House Prices

In the second post published on June 12 ‘10, the PropRate analyst blog looked at the central bank base rate and house prices. The last post demonstrated that the interest spread between the UK BOE base rate and various mortgage rates/UK govt. long term bond yields has widened. The spread has been widening since Nov. 2007 when BOE began to cut rate rates. See Chart 3 BOE Base Rate and Long Term Yields/Interest Rates.

While examining widening spread between short term rates and long term rates – it seems that the spread (Yield on UK 10Yr bond – BOE base rate) could be a leading indicator of the direction of house prices. Chart 1 shows the contemporaneous relationship between house prices and the BOE base rate and UK govt. bond yields. A positive lead-lag relationship appears to exist between with annual rate of change in house prices.

Chart 1 Spread with Annual Change in House Prices

Chart 2 shows the ebb flows of the spread led by 6 months and annual house prices. The spread appears to provide a six month guide of the direction of house price. Admittedly, the lead-lag relationship is not consistent over the time period being examined.

Peaks in the spread lead the peaks in house prices. Peaks spreads also point to a pending downturn in house prices. It will be interesting to see if the current peak in the spread will be followed by reversal in the current direction of house prices.



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