Interest rates can be high in a sluggish economy… if inflation is high too. It’s not impossible, just check the 1970’s. Rising nomimal incomes, rising prices, rising interest rates, lower real incomes, fixed income assets declined a lot in value, equity assets declined less, and housing rose.
How can real housing prices rise in stagflation? In an inflationary environment, assets that can be bought using very high leverage, at fixed rates of interest with many years to repayment, will go up. Why? Because you can use your $1 to buy $10 of assets with a $9 loan, and in 10 years time you will have a debt that is only worth $4 in real terms. Your asset could drop in price by 50% in real terms and you’d be no worse off. if it drops by less in real terms, you have a gain. With the leverage, that gain could be massive. That’s what happened to people who bought housing in the 1970’s and 1980’s. Huge real gains. And even if the prices drop by more than 60% in real terms over the 10 years, so your $10 asset is now worth less than $4 in real terms, less than the debt, you only lose $1. In the US, almost no one is really held liable for mortgage debt in excess of the value of the property. With all that huge upside, and small downside, and other assets being eaten by inflation, everyone can see what a great deal buying houses on leverage is, and demand increases the prices. Can’t happen? Again, just check the 1970’s.
