The result of rising interest rates is that there is an increase in mortgage payments resulting in a lower demand for housing. On the other hand, a fall in interest rates should fuel higher market demand and put increasing strain on house prices. This is supposed to enhance expenditure connected with house-buying and the rise in prices will add to total housing wealth and make consumers more positive about their personal finances.

The cut in interest rates from 7.5% in October 1998 to 5% in June 1999 was said to be a major factor in the acceleration in housing market activity during the summer of 1999. Equally the series of increases in interest rates from 5% in June 1999 to 6% by February 2000 helped to take some of the excess demand for housing out of the market and contributed to a slowdown in the rate of house price inflation during the summer of 2000.

Effective disposable incomes of mortgage payers

If interest rates fall, the effective disposable income of home-owners who have variable-rate mortgages with their building society or bank will increase