What is the economic theory that explains house price inflation and deflation?
If money is available to lenders at a low rate of interest this will stimulate demand for housing. It is supply/demand but not so much of property but of money. If the Bank of England continue to increase interest rates, money becomes expensive for borrowers and demand for housing will reduce. The recent problem in U.S.A. and indeed here is what is called the Sub Prime Market. This is where lenders have lent money to borrowers for houses and the borrowers have not satisfied the normal rule of thumb of earnings as a ratio to borrowings. Traditionally banks would lend 3-3.5 times annual gross income to lenders. In the increasingly competitive lending market banks have overlooked this common sense formula and more people have been able to borrow more money than they can really afford and this has increased demand for housing sending up prices. In addition lenders actually lend money they do not have and borrow money to re lend on the worlds credit market. Banks in America who have suffere
