[DrBubb]

Poll: A doubling of UK mortgage rates "cannot happen"
Are people betting their future ... on specious logic?
====================================

I found a remarkable posting in HPC, on a thread about UK interest rates.

First, here's the article that triggered the posting
1/
Home owners being restricted with loans based on future interest rates
The amount of money banks and building societies are willing to lend to home owners is being based on future interest rate rises for the first time, it can be disclosed..../

Despite an average two year fixed rate mortgage being 4.75 per cent, some high street lenders are basing their affordability calculations on almost double this amount.

Some lenders suggested that when deals run out, borrowers could end up paying a SVR of 8 per cent or higher.

The extra restrictions mean a family with a household annual income of £60,000 may only be able afford to borrow the equivalent of one year’s salary instead of a more traditional three times multiple.

Next, here's the post itself
2/
The doubling of mortgage rates will not happen, it would crash the entire financial system. Shouldn't the banks be more concerned about current borrowers? Can they afford interest rates at 9%?
You then have to consider the wider economic impact, rates at 9% would cause a collapse in aggregate demand leading to a massive collapse in GDP as consumer spending would stop.
This isn't going to happen.

I don't want to pick on the poster, so will leave his name out. But I do think his logic wants examining:

He is saying:

X cannot happen ... because it will "crash the entire financial system".

But In the past two years we have seen various financial systems crash, or nearly crash :

+ Iceland, which when "beyond financial collapse", into a cold world of stagflation, and starvation,
+ The Global economy, which nearly collapsed, but was propped up (temporarily?) by QE
+ Greece, where workers who are about to lose their jobs, or have their salaries cut, are out in
the streets protesting because they think their system is head towards collapse

Russia and the rest of the Soviet Union, went through its own financial collapse over a decade ago.

So it is foolish to think that governments can prevent a collapse, and that you can therefore bet that
they will take actions to effectively prevent it. It is more logical to look at history, and see that they
will take actions to delay problems, and those delays just make the problems worse when they
finally hit.

What worries me, is that there may be many people in the UK who are recklessly buying homes,
with the theory that interest rates will stay "around where they are now", and are not prepared if
rates should rise back to historical levels, let alone a doubling.

Here's a History of UK base rates


Mortgage Rates



I thought we should have a poll here.

[DrBubb]

My own thinking:
I'm a pessimist, and I am expecting a currency crisis to hit the UK within the next year or so, which could eventually force UK mortgage rates up to 7% or higher.

And I also think that banks will require much larger deposits than at present. Maximum LTV could be 60-65%, or even lower.

The best case would be that this crisis is delayed, but delaying it does not make it less likely. Depending on how the delay is achieved, it may make the crisis more likely. The actions of the UK government over the lats 18 months have made this sort of crisis much more likely imho

romans holiday, on Feb 28 2010, 09:09 AM, said:

If the poll were for US interest rates, it would be a lot easier. The rates there look to stay low for a long term as deflation sets in. It is not so simple for the UK though, where the UK might face a "hyper" deflation; assets deflate locally, but the local currency also deflates/ depreciates in the global capital market. It is this flow of capital out, and a weakened pound, which puts prices and interest rates on shaky ground. If they have to defend the currency, then rates go up.... ouch.

The UK will face its currency crisis sooner than the US imho

Sterling / FXB ... update


The break below the important $1.55 level in the last 2 weeks is a very worrying sign.

This post has been edited by DrBubb: 28 February 2010 - 01:21 AM

[DrBubb]

Interesting.

After 14 votes,
On this question:
If UK Mortgage are now 4 - 4.5%, where will they be in mid-2011?
Your best guess, please:
Under 4% (0 votes [0.00%])
4-5% (0 votes [0.00%])
5-6% (5 votes [35.71%])
6-7% (2 votes [14.29%])
7-8% (5 votes [35.71%])
8-9% (0 votes [0.00%])
9-10% (1 votes [7.14%])
Over 10% (1 votes [7.14%])
===

No one (so far) thinks that rates will stay below 5% into mid-2011.
And yet, you can find mainstream pundits, like this one:

DrBubb, on Feb 28 2010, 09:14 AM, said:

WHAT OTHERS THINK, #1:

Interest rates could stay low for 5 years, says Bootle

One of the UK's best known economists, Roger Bootle, predicts that interest rates will stay below 1% for the next five years.
His predictions will bring little cheer to thousands of British companies that import from the eurozone.
Brian Milligan reports.
/see: http://news.bbc.co.u...ess/8444939.stm

I think more people are listening to the mainstream's Poodle, than you would think
by reading HPC.

This post has been edited by DrBubb: 28 February 2010 - 02:00 AM

[A.steve]

DrBubb, on 28 February 2010 - 01:58 AM, said:

No one (so far) thinks that rates will stay below 5% into mid-2011.
And yet, you can find mainstream pundits, like this one:

Hmmm - well, interest rates are half a percent right now - yet typical mortgage rates are ~4 to 4.5%. New mortgage rates could easily climb to 5,6,7,8% or more without the base rate shifting.

Something I've been thinking about a fair bit, but can't quite get my head around, is the relationship between sovereign debt yields and base rates. During the ERM crisis base rates rose rapidly and substantially - and the explanation was that the government had borrowed £16bn in a hurry - and this had forced up bond yields. What I don't understand is why, if bond yields increase, must the base rate also increase? Sure, I understand that a very low base rate (short-term rate) in the context of medium/high longer-term borrowing costs implies that borrowing short to lend long becomes very lucrative... if only (state owned) banks gain reliable access to large amounts of short-term cash... then might this be a reasonable way to facilitate them to make big profits to offset their bad debts?

Can (base) interest rates remain low (below 1%) while retail rates rise to 5-10%? What are the implications I've not considered? What would force the hand of government/the BoE to increase the base rate?

[DrBubb]

Relevant to the prior questions too

WiseBear, on Feb 28 2010, 11:45 AM, said:

I think we first need to ask the question: Who sets interest rates?
If you believe it is the government/BOE then low rates will be here for years to come however if you believe it is the market (as I do) then there appears to be little hope of avoiding higher rates. The market will not continue to lend as sterling falls and default risks increase without demanding higher rates.
The only way I can see the market accepting low rates is if deflation kicks in harder and people flood into cash/bonds.
Either way the housing market is doomed.

A relevant question.
My view is the BofE can set short term rates, and the market (ultimately) sets long term rates.

But if Sterling crashes, then the BofE may find that it must accept an unhappy dilemma, and push up short rates too.

[otters]

DrBubb, on 28 February 2010 - 03:52 AM, said:

Relevant to the prior questions too

A relevant question.
My view is the BofE can set short term rates, and the market (ultimately) sets long term rates.

But if Sterling crashes, then the BofE may find that it must accept an unhappy dilemma, and push up short rates too.

How is it that Japan has kept its rates low for such a long time, surely they must be subject to market forces, or did the carry trade help?

[ken_ichikawa]

DrBubb, on 28 February 2010 - 12:59 AM, said:

I thought we should have a poll here.

Hey Bubb what is a good site to look for somewhere to rent in HK and maybe rent a place out? , a minor plan of action is this maybe rent out the place in the stix and use the income from that to rent somewhere closer to Kowloon, drives me nuts spending so much (time/money) on the MTR.

[DrBubb]

Under 4% (2 votes [2.99%]) : 3.5 x 2 = 7.0
4-5%. ( 1 votes [01.49%]) : : 4.5 x 1 = 4.5 .. 11.5 /3
5-6% (16 votes [23.88%]) : : 5.5 x16 = 88.0 .. 99.5 /19
6-7% (23 votes [34.33%]) : : 6.5 x23 =149.5 .. 249.5/ 42
7-8% (13 votes [19.40%]) : : 7.5 x13 = 97.5 .. 347.0 / 55
8-9% ( 1 votes [01.49%]) : : 8.5 x 1 = 08.5 .. 355.5 / 56
9-10% (1 votes [01.49%]) :: 9.5 x 1 = 09.5 .. 365.0 / 57
Over 10% (5 votes [7.46%]) 10.5x5 = 52.5 . 417.5 / 62
====================

Therefore, the average guesss amongst 62 voters on HPC is : 6.73%

Such a rise by mid-2011 would be enough to seriously undermine houseprices IMHO

This post has been edited by DrBubb: 28 February 2010 - 02:31 PM

[DrBubb]

ken_ichikawa, on 28 February 2010 - 11:36 AM, said:

Hey Bubb what is a good site to look for somewhere to rent in HK and maybe rent a place out? , a minor plan of action is this maybe rent out the place in the stix and use the income from that to rent somewhere closer to Kowloon, drives me nuts spending so much (time/money) on the MTR.

Hmm.
Have you checked out Tung Chung yet?
I spent the afternoon there, and it is very pleasant on a day like this

What is your budget btw?

This post has been edited by DrBubb: 28 February 2010 - 02:31 PM

[Cicero]

DrBubb, on 28 February 2010 - 12:59 AM, said:

Poll: A doubling of UK mortgage rates "cannot happen"
Are people betting their future ... on specious logic?
====================================

I found a remarkable posting in HPC, on a thread about UK interest rates.

First, here's the article that triggered the posting
1/
Home owners being restricted with loans based on future interest rates
The amount of money banks and building societies are willing to lend to home owners is being based on future interest rate rises for the first time, it can be disclosed..../

Despite an average two year fixed rate mortgage being 4.75 per cent, some high street lenders are basing their affordability calculations on almost double this amount.

Some lenders suggested that when deals run out, borrowers could end up paying a SVR of 8 per cent or higher.

The extra restrictions mean a family with a household annual income of £60,000 may only be able afford to borrow the equivalent of one year’s salary instead of a more traditional three times multiple.

Next, here's the post itself
2/
The doubling of mortgage rates will not happen, it would crash the entire financial system. Shouldn't the banks be more concerned about current borrowers? Can they afford interest rates at 9%?
You then have to consider the wider economic impact, rates at 9% would cause a collapse in aggregate demand leading to a massive collapse in GDP as consumer spending would stop.
This isn't going to happen.

I don't want to pick on the poster, so will leave his name out. But I do think his logic wants examining:

He is saying:

X cannot happen ... because it will "crash the entire financial system".

But In the past two years we have seen various financial systems crash, or nearly crash :

+ Iceland, which when "beyond financial collapse", into a cold world of stagflation, and starvation,
+ The Global economy, which nearly collapsed, but was propped up (temporarily?) by QE
+ Greece, where workers who are about to lose their jobs, or have their salaries cut, are out in
the streets protesting because they think their system is head towards collapse

Russia and the rest of the Soviet Union, went through its own financial collapse over a decade ago.

So it is foolish to think that governments can prevent a collapse, and that you can therefore bet that
they will take actions to effectively prevent it. It is more logical to look at history, and see that they
will take actions to delay problems, and those delays just make the problems worse when they
finally hit.

What worries me, is that there may be many people in the UK who are recklessly buying homes,
with the theory that interest rates will stay "around where they are now", and are not prepared if
rates should rise back to historical levels, let alone a doubling.

Here's a History of UK base rates


Mortgage Rates



I thought we should have a poll here.

Excellent analysis and saved for future reference!

[AvidFan]

It just has to be 6-7% in a year or so. No buyers of gilts, QE would crush the pound, inflation rising, BoE governor confirming a rise to "more normal" 2% base rates. If banks just pass on these hikes, we'll get to 6.5%, end of.

[Cicero]

AvidFan, on 28 February 2010 - 03:12 PM, said:

It just has to be 6-7% in a year or so. No buyers of gilts, QE would crush the pound, inflation rising, BoE governor confirming a rise to "more normal" 2% base rates. If banks just pass on these hikes, we'll get to 6.5%, end of.

+1 True.

[DrBubb]

Manual labourer, on Mar 1 2010, 02:12 AM, said:

However imagine if the gbp drops to 105 or even 90cents to the dollar,1.20 to the Euro as some have predicted.
Then the same occurs GBP based assets are cheap 60% cheaper unit labour costs are cheap.

Looking futher into the future any amount of international companies looking to expand into European markets, or maintain there current operations now ... or post the current situation, will look for a Uk base they will be attracted to GBP sites will have significantly devalued against all other European

Euro denomomated states, in terms of land, wage unit costs!!!
Also existing businesses will be bought up for market share, ie Kraft buying Cadbury.

...Whilst Mr and Mrs Smith still live in their million GBP terrace,(which will have devalued 50% in world terms)
and earn 100k at the town hall,(which will have devalued 50% in world terms) population they will be kept happy .

Problem is:
+ Someone may pay 1,000,000 GBP for a their terrace home, but the Smiths cannot afford to buy their own home
with an income of 100k.
+ They can only afford to live there, because their mortgage is 250K or whatever, because they bought the home
years ago, when it was cheaper.

At some point, the cash-rich buyers willing to pay such a high price will get exhausted,

and/or rates will begin to tick up, then that big stretch between the prices, and what UK-income earning buyers
can actually afford will begin to weigh on prices, and they will head down towards more normal ratios to income,
whatever the pound is trading at.

If a falling pound fails to boost incomes substantially, and instead forces rates higher (to protect the currency),
property prices will come thundering down.

I think you may see this scenario play out within months rather than years

This post has been edited by DrBubb: 28 February 2010 - 11:52 PM

[DrBubb]

DrBubb, on 28 February 2010 - 01:09 AM, said:

The UK will face its currency crisis sooner than the US imho

Sterling / FXB ... update


The break below the important $1.55 level in the last 2 weeks is a very worrying sign.

Pound under attack as debt worries grow

David Smith, Economics Editor

THE pound faces a rough week with uncertainty over the outcome of the general election and concerns over the public finances threatening to trigger a new wave of selling.

A dwindling Conservative poll lead is heightening fears of a hung parliament. Fears over Greek debt, which were undermining the euro, have begun to hit sterling, as concerns have grown that worries over sovereign debt could spread.

George Papandreou, the Greek prime minister, will hold talks with Angela Merkel, the German chancellor, on Friday. Their meeting comes amid a report that a German-led bailout for Greece will involve KfW, the state-owned development bank, buying or guaranteeing Greek government bonds.

However, several leading private German banks have said they will not buy any more Greek debt and yesterday the German finance ministry refused to comment on the plan.

Greece’s woes had hit the euro hard but last week attention shifted to sterling, which was undermined by weak investment data and dovish comments from Mervyn King, the Bank of England governor, and some of his monetary policy committee (MPC) colleagues.

The MPC, which meets this week, is set to leave Bank rate unchanged at 0.5% and stick with the existing £200 billion of quantitative easing, despite hints from some members that more could be done.

The “shadow” MPC, which meets under the auspices of the Institute of Economic Affairs, has voted 6-3 to keep Bank rate on hold, with three members urging an immediate half-point rate rise. Several shadow MPC members said the Bank should be ready to announce further easing, with one, Peter Warburton, advocating an extra £25 billion immediately.

“Both hawks and doves agreed that the recent UK output data had been disappointingly weak and that there was a serious risk of a renewed downturn in activity,” the shadow MPC’s minutes said.

/more: http://business.time...icle7043834.ece

[Pedro for the Fed]

AvidFan, on 28 February 2010 - 03:12 PM, said:

It just has to be 6-7% in a year or so. No buyers of gilts, QE would crush the pound, inflation rising, BoE governor confirming a rise to "more normal" 2% base rates. If banks just pass on these hikes, we'll get to 6.5%, end of.

can't see anyhting but higher mrotgage rates in the near term and have gone for a 75% chance of doubling in five years.

reasons.

1 leverage in the banking system-post basel II,one would need to question the supposed value of some captial assets and the way they've been offset in the credit derivatives market as discussed here.
FT Alphaville
'In non-Basel speak: if you own a risk weighted security, you can reduce its regulatory risk weighting by hedging against it using credit derivatives. A bank could thus own a security rated BBB (implied risk weighting: 100%) but using sufficient hedging -with, for example, AIG – treat the security as if it was rated AAA (implied risk weighting: 20%).'
Can anyone see a flaw here?Definitely a possibility this will cause higher risk premiums in loans

2 further CRE/RRE losses constricting lending and impacting asset values in a vicious circle,which again would lead to a higher risk premium being priced in to loans.

3 Sterling risk either via QE,fiscal problems or other exogenous event(s)

It's late,it's complex-to me anyway.Interesting results so far.

This post has been edited by Pedro for the Fed: 01 March 2010 - 12:11 AM