Gary Stevenson

So when you look at an investment, the most simple investment you can make is to say put your money in a savings account.

Because you know you put it in there and the bank's going to say, we're going to give you 5% a year.

You put a million pound in the savings account at 5% a year, you are gonna get your 5% a year, which is 50,000 pounds a year.

Now, let's assume you're also looking at an alternative investment, which is you wanna buy a buy-to-let property.

And you found yourself like a nice big house, big luxury house that you can rent out for 50,000 pounds a year.

And you're thinking, OK, well, how much should I pay for it?

Well, you know that if you put one million pounds into a bank account, you're going to get fifty thousand pounds a year, which is the same return as this rental property.

So you would imagine since both of these investments yield a similar return of fifty thousand pounds a year, this house should also be worth maybe something close to one million pounds.

it's a simplified example but it makes sense right you know if interest rates are five percent then a house that gives 50 grand a year rent should be roughly equivalent to an bank account that gives 50 000 pound a year interest in rent okay so this house should be worth about one million pounds if rates are about five percent now let's assume rates are much lower one percent if

Now, if I put my 1 million pounds in a bank account, I'm only going to get 10,000 pounds a year.

Poor me.

Now, let's assume that the same house is on the market and it's still able to get something like 50,000 pounds rent.

In this example,

Would I be willing to pay a million pounds for this house?

Well, a million pound is only going to get me ten thousand pounds in a bank account now.

So in order to get fifty thousand pounds, the amount I would have to put in a bank account to get fifty thousand pounds now is going to be five times bigger.

This is equivalent to five million pounds.

So in theory, and again, this is a very simplified example, if interest rates are 5%, then a £50,000 a year rental house should be worth about 1 million.

But if interest rates are 1%, that same £50,000 a year house should be worth about 5 million, which is enormous, five times bigger.

so i think what this shows you is just just basically and again this is a very simplified example this shows you that in theory interest rate reductions especially big interest rate reductions should have in theory the power to push asset prices especially assets that have a return like housing or like profitable stocks up really a lot okay this is very simplified but i'm trying to give you the basic understanding that interest rates in economic theory