My economics is so-so. Been reading up on house prices again and the

phenonemon called "Money illusion" whereby people think buying a house

is cheaper when interest rates are lower but in fact they will end up

paying exactly the same because of low inflation.

Anyone care to comment ?

In my experience -:

Buying a house with a mortgage means that you owe the Bank or Building Society

the sum borrowed plus interest.

Whether you have a 'Repayment Mortgage' (paying off some part of the capital

plus interest each month) or an 'Endowment Mortgage' (paying interest only each

month, and paying-off the capital at the end of the loan's term via an Endowment

Policy), or some other loan arrangement, you wind-up making a payment out of

your disposable income every month for the term of the loan.

Initially the repayments are likely to be a considerable percentage of your

disposable income.

High inflation brings with it a high interest rate, and unless you have a fixed-

rate mortgage, an increase in the 'Interest' part of your mortgage repayments.

But high inflation reduces the value of the unit of currency and also causes

salary increases which go someway toward off-setting the reduction in the value

of the unit of currency - you get more Pounds per month in your pay-packet,

though your new number of Pounds per month won't buy any more than did the

previous lesser number of Pounds.

So, you still owe the same number of Pounds-worth of the capital borrowed (or

outstanding), but you owe more Pounds in interest.

If the rate of inflation then reduces, the rate at which your salary is

increased to cover inflation also reduces - but so does your interest

repayments, but the fact that you now get more Pounds per month makes the

capital borrowed (or outstanding) less of a multiple of your annual salary.

If you earn 5,000 and borrow 15,000 - frightening - and the repayments are a

struggle.

High inflation and high interest rate - repayments becoming a little less of a

struggle.

After some years the inflation and interest rate falls - but past inflation

means that your 5000 pay is now 20,000 - but the capital borrowed is still only

15,000

20,000 now, buys no more than 5,000 did then - but 15,000 back then was three

times your annual salary, now it is three quarters!