Interest rates don't predict house price movements

Standard market lore dictates that low interest rates create high house prices because it means that mortgages are cheaper, so borrowers can afford to pay more for houses.

I've been reading "The Only Three Questions That Count" by Ken Fisher. His first question is "what is it you believe that is actually false?" We should question our beliefs, and see how they stack up against the evidence.

I thought I'd do that for house prices over the last decade. 2000-2009 was probably an extraordinary decade for house prices, given relatively low interest rates for the UK. I used the following source:
* Interest Rate History - for interest rates (duh!)
* JRF Housing and Neighbourhoods Monitor - for house prices

Using those two sources, I compiled the following table:

      IR  HP
2000 5.9 101
2001 5.1 112
2002 4.0 128
2003 3.7 155
2004 4.4 180
2005 4.5 190
2006 4.9 204
2007 5.5 223
2008 4.2 227
2009 1.0 226

IR - average interest rate (%)
HP - house prices (£000s)

For the whole period, 2000-2009, HPs (house prices) rose an average 9.4% pa. During the decade, there were two periods of sustained rate reductions (2000-2003, 2007-2009) and one period of sustained rises (2003-2007).

In the period of generally rising rates (2003-2007), where interest rates rose from 3.7% in 2003 to 5.5% in 2007, house prices rose 43%, equivalent of 9.5% pa - slightly above the average rate. Right there, we see that increasing rates does not imply poor results for housing.

In the period 2000-2003 when rates fell, house prices were up 53%; an annual rise of about 15.3%. This provides confirming evidence for our original hypothesis. It's not all plain sailing, though. If you look at 2008-2009, there was a precipitous drop in interest rates, but it the only period in which house prices actually fell.

The conclusion is that interest rates do not predict house price movements, despite what common sense dictates.