Wednesday, Sep 19, 2007
But for how long now rates are starting to come down, this happened in 2005 before rates were cut.
Mortgage Provider: House prices finally start to fall
Rightmove has backed up last week's findings from the Royal Institution of Chartered Surveyors (Rics) and agreed that house prices have indeed now started to fall.
Posted by david20040_0 @ 06:57 PM (215 views) Add Comment
2 Comments
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1. Dugmug said...
David...whilst I think that it would be a really bad move in the long term, because of the effect on inflation and the value of the pound (which are both kind of linked anyway), I do believe there is a chance that rates could see some lowering. It will be more of a symbolic gesture than anything, to make it look like the powers that be are trying to do something, because in my opinion things have gone too far and a downturn is now inevitable - cutting rates will "at best" soften the hardship to come, rather than averting it, and even then only in the short term (in long term it will likely make things worse). The pure financial arguments would at least keep rates level, but some politics will come in here and make the BoE do the wrong thing, I suspect.
However, in terms of house prices specifically, this is highly unlikely to be a repeat of 2005 even if the BoE do cut (and I think there is a good chance they will try to tough it out for a while yet). In 2005 rates were still relatively low and lending standards were still lax. So when the BoE seemed to be saying, "hey, keep partying for a while, there's still money to be made here" (by making their cut), it was really easy for all the speculators to pile straight back in. Today, rates are that much higher, lending criteria are already being tightened, and everything is 2 years more "unafforadable" than even they were in 2005. It also seems that sentiment towards risk has taken a real nose-dive of late, which I don't remember being the case in 2005 either.
HPC is about whether people will be able to "afford" to pay crazy prices for houses by borrowing sums they can't really afford (lax critieria) cheaply (low mortgage rates) anymore; fact of the matter is that these things have changed (criteria tighter, mortgage rates detaching from the BoE base rate anyway), so they will not be able to anymore, which kicks the legs right out from under the market. I honestly think we've reached a true turning point, in which case the small cut in the base rate won't be enough this time (the mortgage lenders are now scared and this is the important thing - I think it will now take a lot to calm their fear again).
2. Dugmug said...
I think things have reached a turning point - there's only so much credit you can add to a system to keep the pyramid scheme going, and we've really been beyond that point for some while; things have been "irrational". The recent problems in the international finance markets, sub-prime defaults in the US, busted hedge funds, the Northern Rock debacle, have all changed the mood - given people a good slap in the face to bring them to their senses if you like! As a result the mortgage lenders are now scared again - scared enough that they are tightening their lending criteria, increasing rates above the BoE base rate, trying to hoard cash rather than give it away, etc. In short, "things are different" to 2005.
I think we're in for a downturn in the economy now, whatever the Government and The Bank try to do. If they drop rates it will just store up more trouble for the mid- to long-term, but it will look like they're trying to "do" something so there will probably be political pressure to do just that. I reckon The Bank will try to stand firm for a few months yet, but the pressure will tell in the end. Small cut around Christmas time?
But in terms of the housing market specifically, I think it's already too late. In 2005 rates were still relatively low and lending standards were still lax. So when the BoE seemed to be saying, "hey, keep partying for a while, there's still money to be made here" (by their symbolic cut), it was really easy for all the speculators to pile straight back in. Today, rates are that much higher, lending criteria are already being tightened, and everything is 2 years more "unafforadable" than even they were in 2005. It also seems that sentiment towards risk has taken a real nose-dive of late, which I don't remember being the case in 2005 either.
It's about whether people will still be able to "afford" to pay crazy prices for houses by borrowing sums they can't really afford (lax critieria) cheaply (low mortgage rates); fact of the matter is that these things have changed (mortgage rates increasing ahead of the base rate, lenders requiring lower income multiples and higher deposits), so they will not be able to anymore, which kicks the legs right out from under the market.