Saiz (2014) suggests that about 50 percent of the variation in house prices during the 2000s boom can be explained by low interest rates, and finds that it was the remaining, “non-fundamental” component that subsequently collapsed – that is, the interest rate component was not a primary factor in what Saiz terms “the bust” (see Albert Saiz (2014), “Interest Rates and Fundamental Fluctuations in Home Values (PDF)”, paper presented at the Public Policy and Economics Spring 2014 Workshops, hosted by the Harris School of Public Policy, University of Chicago, April 8).
On this point, I recall the famous remark made before the surfacing of the subprime mortgage problem by the then CEO of a major financial institution that “while the music is playing, you have to dance.” If, in the future, benign economic conditions similar to that time, namely high economic growth, low inflation, low interest rates, and low market volatility continue for a long time, would managers of financial institutions and investors choose different management and investment strategies?