"I presume you refer to low interest on mortgage loans.
Think of interest as rent. If you are leasing an apartment to someone and the cost of apartments are going to double over the term of the lease (inflation), you will factor that into the rent (interest) because the apartment is "worth" more as the price rises. Thus, low inflation leads to low interest.
Actually, you don't "know" what will happen to the costs, but you do the best estimate you can. You are trying to cover the risk that prices will rise.
Why is interest so high on credit card debt? Different factor - not inflation risk but risk of "bad" debt -- risk of not getting paid."
Where do you live, that the "low inflation" in houses has led to low interest rates?
On both coasts, prices have doubled in 5-6 years.
Mortgages seem to be another kettle of fish, as are apparently many car loans.
Why?
Everything isn't covered below, but here are a few factors:
The risk of bad debt often isn't borne by the lender--the debt is sold to some one else, or through a series of derivative transactions the risk is transferred. Sounds OK in principle, but in the case of Fannie Mae, and Freddie Mac (which handle about 50% of mortgages) some of that risk is passed on to the US taxpayer, because of the "implicit guarantee" that these quasi-government agentcies enjoy. Or the many debts are bundled up and resold as a bond, which often ends up in mutal funds. Throw in a bunch of derivatives and swaps, and the risk of the mortgage, car loan, or high-risk business loan might actually be wrapped up with a product mascarading as Treasury debt. A piece of your mortgage or car loan could be in your retirement account--or maybe the risk.
Someone who refinances their "appreciated" house and withdraws cash is in effect a buyer who is actually interested in "buying" the house for the greatest possible price with the assistance of a lender who is intersted in seeing the house "purchased" for the greatest possible ammount and who susequently transfers the risk of the bad debt on an over-appraised house to someone else. This is NOT a situation of "supply and demand" as normally formulated.
American car manufacturers make more money on extending loans for cars and yes, in some cases houses, than they do making and selling cars. In some cases the car arm is consistently losing money.
In overheated housing markets, it IS cheaper to rent than to buy, and sometimes by quite a lot. As well, here, nearly 50% of mortgages originated last year were interest-only. This isn't "home-ownership" it is renting, where the renter pays property tax and maintenance. In many areas there are more registered real estate agents than there are properties sold in a year.
People are not buying houses to live in, or rent they are buying them because they are going to be "worth 20% more next year". Like pog, beanie babies or internet stocks. It si one thing to buy futures or deriviatives to hedge aginst fuel costs, or buy a house for the rental income. It is another to buy them because they are going to "flipped" in a few months.
When it is said that the American consumer is "carrying the economy, it is usually via increased debt. We've built a house of cards with "structured fianance", and it's the builders who have made the money. Think Enron.
China (and other countries) buying our national debt and selling us cheap stuff just feeds into this. Everyone here can't be a financier--somebody has to make something.
rant over for now.
