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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum
GLD 375.93-1.8%Nov 14 4:00 PM EST
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To: THE ANT who wrote (87564)3/17/2012 3:15:15 AM
From: elmatador  Read Replies (2) of 217792
 
Why would the natural effect of low interest rates be a house bubble?

Let's look on how asset prices are influenced by the interest rate:

Below is what has been the prevalent situation in Brazil:
1) High interest rates discourage investors in putting their money into property and company shares. This lowers the demand for these assets and their price fall.

2) Lowering the interest rates has the opposite effect. Investors find more attractive to put their money into property and company shares. This increases the demand for those asset prices and and their price increase.

The above is what the Central Bank trying to do over the next two years in Brazil:

You said: Rates will drop and real housing bubble on the way.
I'm trying to discern here why this would be the automatic outcome.

For that I have to go back to the monetary policy of the US post 2002 and its housing bubble.
The FED lent money to commercial banks at low rates expecting it to lend it out to the economy but commercial banks sensed no one was worth the risk. Remember this was the aftermath of Enron, World Com and the tech bubble.

Commercial banks took that money and lent to the real estate sector and farmed out the risk using the Credit Default Swaps as the mechanism and the rest his history.

I think this was very much particular to the US and for a very much particular time in the country.
As you said Brazil passed by that because they were less sophisticated than the developed world financial system.
But there is more. In the case orf 2) above, Brazil have got much more asses for money to flow to rather than building and selling houses and reselling it again. Yes, that can be a component. Will work similar to car market. There is a defict of houses and banks would find takers to improve housing conditions. And people would move up to a better place but won't be the only asset for money to flow to.
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