Do housing prices decrease when interest rates go up? Housing prices and interest rates: understanding the positive correlation across five countries

Abstract

This paper investigates the relationship between changes in interest rate and house prices from the period 1975 to 2023 in five countries: United States, United Kingdom, China, Germany and Indonesia. Results show that contrary to the paradigm of real estate pricing, housing prices increase with interest rates. Furthermore we find that changes in house prices are independent of monetary policies and interest rate changes set by the central bank. Economically developed nations exhibit a stronger correlation between the two variables. We demonstrate that this is due to the 2008 financial crisis, where houses fell by nearly 30%, creating a fear of recession and the resulting policy of low interest rates to encourage investment.