Tuesday, Aug 18, 2009
House prices still not low enough according to Bootle
CityWire: Roger Bootle: House price affordability misleading
He said: 'With interest rates currently at unusually low levels, initial affordability may therefore be painting a somewhat misleading picture of the true position.'
Posted by voiceofreason @ 09:05 AM (1224 views) Add Comment
14 Comments
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1. japanese uncle said...
'Still not low enough' is a grossly misleading expression. It should be 'far from low enough'. Further 50pc HPC (70pc in London) is a must and inevitability for this economy to restart humbly from scratch.
2. drewster said...
"if rates rose to long-term average levels of around 6-7% it would make mortgages very expensive once more"
Why would rates go up? The central banks of the world seem to be in no hurry to raise interest rates, and inflation is relatively tame. Japan held interest rates at near-0% for twenty years after its property bubble burst. (House prices fell anyway).
3. voiceofreason said...
drewster,
http://news.bbc.co.uk/1/hi/business/8206748.stm
RPI unexpectedly up...
4. jack c said...
drewster - this article from last Thursday's FT (IMO whichever way you stack things up it's a good idea to have a hedge against inflation)
US fund managers are buying gold to protect their personal wealth against excessive inflation, according to Moonraker Fund Management.
After interviewing 22 hedge fund managers during a factfinding trip to the US, Jeremy Charlesworth, chief investment officer of Moonraker and manager of the Moonraker Commodities fund and Global Opportunities fund, discovered the majority were buying gold to protect against the effects of quantitative easing in the UK.
Mr Charlesworth said there was a fear this policy would eventually result in a bout of steep price increases.
He said: "Gold is the ultimate currency, performing best when economies are at extremes, whether that is inflationary or deflationary. The managers I met in the US know that if the politicians get the quantitative easing programme wrong then the value of money relative to real assets will dwindle.
"History is littered with such instances. Governments have a track record of destroying the value of money over the long term and currency devaluation is a relatively painless way for them to reduce the value of the enormous debt that is hampering economic recovery now.
"Everyone agreed that sentiment is better than it was a few months ago but none of the structural problems have yet been fixed. Double-digit inflation two or three years down the line is a very real possibility."
Nigel Speirs, chief executive of Whales-based IFA Buckles Investment Services Limited, said inflation was a danger but he thought double digits was rather an alarmist forecast.
He said: "Gold is always seen as a hedge against inflation but we are all slightly more worried about quantitative easing ending."
SOURCE - http://www.ftadviser.com/FinancialAdviser/Investments/AssetClass/Commodities/News/article/20090813/69da772c-7d1a-11de-8bc1-0015171400aa/Managers-trust-gold-for-ultimate-protection.jsp
5. mark wadsworth said...
@ Drewster, the BoE base rate has little to do with things - remember that this is the rate that the BoE PAYS to banks that deposit with it (and UK commmercial banks have about £160 billion deposited with the BoE - an all time high!) and NOT the rate at which it will lend (which is known as Standing Lending Facility and/or Lender of last resort rate).
The rate that banks pay is some average of bond rates (and the rate on new bond issues is well over 5%), deposit rates (2%-ish), LIBOR plus whatever they have to pay BoE for bad assets insurance. Whatever this rate is, it's closer to 4% than 0.5%, so add on another 1% for bad debt provisions and another 1% for running costs and profits, and in the medium term banks will have to charge at least 6% on the money they lend.
Those lucky people with trackers who are now paying 1% or less will see their payments go up by a factor of what, four or five or six, when their tracker rates expire. That'll be enormously good fun when it happens.
6. jack c said...
As a follow on to mark wadsworth's comments Tuesday, August 18, 2009 10:53AM this from the Telegraph - Banks profiteering on mortgages with record gap between borrowing and lending rate. Banks are making the highest profits on mortgages since records began. Customers are also facing record costs for overdrafts and personal loans.
SOURCE http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/6012657/Banks-profiteering-on-mortgages-with-record-gap-between-borrowing-and-lending-rate.html
7. timmy t said...
FTB's buying now will find themselves in the same situation as the sub-primers, sucked in by low interest rates but left floundering and homeless when the rates go up.
8. drewster said...
mark w,
I understand that mortage rates aren't linked to the base rates, but for people on tracker mortgages (a large proportion) and people currently on fixed-rate mortgages which will soon lapse onto trackers (also a large proportion), the cost of servicing debt will remain low. This means there will be no forced sales, so the HPC will be slower and more drawn-out. Or am I missing something?
9. 51ck-6-51x said...
article dated 01 July 2009 ?
10. jack c said...
drewster when a tracker or fixed rate mortgage comes to the end of it's term it will (in 99% of cases) revert to standard variable rate. The only real winners at the moment in my experience are those with term trackers ie where the tracker runs for the actual term of the mortgage.
I spoke to someone this morning who has just come off a tracker rate with Halifax 0.5% + 0.4% = 0.9% which reverts to SVR @ 3.5% and they are whinging like mad at the increase in payment - what are they going to be like when the base rate rises?
There are lots of people who can barely service the debt when IR's are at historic lows so they will be right up S**t creek when rates inevitable rise and this will ultimately put downward pressure on house prices due to forced selling etc... I do agree with your point that this all looks a more slow and painful event than an outright crash.
11. mark wadsworth said...
@ JackC comment 6, yes we covered that article before, but they made the mistake of comparing actual SVR with base rate, which is meaningless (as I explained above).
The long term average spread is about 2% (to cover profits, running costs and bad debts). Given that bad debts are rising sharply, it's only fair to expect banks to try and increase the spread (to what, 2.5%? 3%), and seeing as "the banks" are to some extent the same as "the taxpayer", I don't see why that is necessarily a bad thing.
12. jack c said...
@mark wadsworth - agreed regarding your last point however if the lenders had adopted this strategy together with a more responsible approach in the first place they wouldnt be in such a mess.
13. timmy t said...
I guess risk (and therefore spread) was low for years largely because the debt was repackaged and sold on. Now the market for this has evaporated, banks have to hold on to much more of the debt themselves. So not only is the risk of default rising, but that risk is now carried by the lender - therefore priced accordingly.
14. 51ck-6-51x said...
The current sharp ratio ( a measure of risk premium i.e. return / risk ) best fit across asset classes stands at around 0.6, which is double what it was pre-crisis, that should attract capital to riskier assets! Mortgages are one of the many asset classes riskier than cash and government bonds where a heap of capital is allocated right now - the spread may ( or may not ) go up in the short term ( < 6m ), but competition for these assets will probably drive the spread back down in the medium ( 6m - 3y ) term I think ( although not to the lows achieved during the mania stage, when some spreads were negative - I knew someone who re-mortgaged to a BoE-0.16% 2 year tracker a couple of weeks prior to the Lehman bust. - jack c may have even better examples of the negative basis though. )