When discussing housing bubbles and interest rates, many conveniently forget the role of central banks.
Their remit is independence to manage inflation across the entire economy through setting interest rates, not just the housing market.
As the prices of good increases (inflation), a central bank will raise interest rates to encourage saving and reducing demand. As demand is reduced, so are the cost of goods, hence inflation is reduced. Reverse this and you have the reason for lowering interest rates.
We have lived in a period of low inflation. The Cold War ended and China and India entered the global economy. This reduced the costs of goods and services. How much does a kettle or toaster cost now compared to ten years previously? In addition, Western Europe, particularly the UK has had a cheap labour influx from Eastern Europe.
China and India are now demanding more energy, which increases the cost of production, transportation and living. As such inflation will keep rising as will interest rates. The impact on the housing market is obvious.
