A fall in house prices helped improve home loan affordability overall in January, but higher interest rates wiped out most of the gains, according to the monthly Fairfax Media home loan affordability report.Has the report got the causation right and is an inverse relationship between interest rates and house prices surprising?
The causation would run from high interest rates to lower house prices, so given that house affordability depends on both interest rates and house prices, and they are inversely related, you would expect one to counter the other.
As interest rates increase, demand for housing should drop and this lower demand should lead to lower house prices. On the other hand, should interest rates drop, housing demand would increase and hence house prices would increase. So this inverse relationship will mean that the gains in housing affordability from a reduction in interest rates will be countered by an increase in house prices.
Another report tells us Rising fuel prices force people to stay home. This article says
Rising fuel prices are forcing nearly a third of New Zealand drivers to drive their car less often, according to new research.Why is this news? Demand curves, including those for fuel, slope downward.
Research New Zealand director Emanuel Kalafatelis said the rising cost of petrol and diesel over the past year had resulted in 32 percent of those polled saying they were driving their car less often.
I guess as an economist, the good news from these stories is that people, even in New Zealand, respond to prices, which affects both their patterns of consumption and the (efficient) allocation of resources. Prices appear to be doing what they should, giving people the incentives needed to change their behaviour. But why does the media print such stories without any apparent thought or analysis? Slow news day?