Will Rising Interest Rates Torpedo Stock and House Prices?

Interest rates around the world are poised to rise. Short-term rates have gone so low since the worldwide recession of 2001 - 1% and 2%, respectively, in the United States and the Eurozone, and practically zero in Japan - that a strengthening world economy will force central banks to tighten the monetary reins.

Australia's central bank has already been raising rates since May 2002, and Great Britain's since November 2003.

In the US, the two-day Federal Open Market Committee meeting on June 29-30 is likely to mark a major turning point, reversing the steady decline of the benchmark federal funds rate since Alan Greenspan began loosening monetary policy in 2001. This is likely to be followed by rate increases in China, the Eurozone, and elsewhere.

Given the tendency of central banks to change interest rates gradually, any change of direction likely means more changes in the same direction later. What will this landmark change mean for prices of such assets as stocks and homes?