From AME Info:
The relationship between the cost of money and asset prices is pretty well established. Asset prices tend to rise if interest rates are falling, and fall if interest rates are rising. Last week interest rates went up, so are stocks and real estate coming down in price?
... What ultimately determines the value of an asset is its return relative to interest rates. Share dividend yields can be low if interest rates are low; house rental yields can be low if interest rates are low.
But if interest rates go up then dividends on shares are worth less by comparison and so share prices generally fall. Likewise if the cost of a mortgage goes up then the value of a house has to fall to compensate for the increased cost of money and the relative decline in rental value.
That is all broadly correct of course, all things being equal.
What is a myth, or obfuscation at best, is the notion that stocks, shares and land are "assets".
Surely things like cars, machines, buildings, software, experience and know-how are "real assets"? The price/cost/value of these is largely unaffected by interest rate changes.
The "assets" whose price changes as a result of interest rate changes are not "real assets", they are flows of monopoly-type income, i.e. where the amount of income the owner receives from the "asset" is fairly fixed and cannot (easily) be competed away; the only way to get your hands on those sources of income is to buy the "asset" itself.
And taking the economy as a whole, for every recipient of such income there is a payer, and such "assets" add nothing to overall national wealth or national income.
- Interest received by holders of government bonds are matched with taxes paid by taxpayers.
- If there were no barriers to entry in any industry, then shares in companies would only be worth what the underlying "real assets" are worth, so the surplus of the share price over net asset values is a measure of any company's monopoly income. Where there are monopolies, innovation and competition is stifled and prices are pushed higher (or output pushed lower). This is bad.
- For every landlord there is a tenant - if the net present value of the rental income goes down (or up), then so does the net present value of the future rental payments from the tenant's point of view. Collecting land rents (also a kind of monopoly income) adds nothing to the economy, they are a way of redistributing GDP to landowners.
It is quite different with "real assets".
If a building burns down, or a car rusts to bits, or a machine breaks down, then clearly, not only is the individual owner of that "real asset" worse off, but the whole of society is worse off.
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