Friday, Dec 18, 2009
Lambs to the slaughter... or do the majority know something we don't?
Telegraph: A mortgage rate timebomb is in the making
According to new figures from the mortgage broker John Charcol, fixed rate mortgages have never been less popular. When remortgaging or taking out a new mortgage, householders are instead en masse opting for tracker or variable rate deals. In November, barely more than a fifth of John Charcol clients chose a fixed rate deal, against more than 80 per cent just six months ago. The reason? Exceptionally low short term interest rates mean that trackers are a whole lot cheaper that fixed rate deals. But for how long? Most analysts anticipate that short term rates will stay low for a long time. If they are right, then a good tracker ought to cost less over a two to three year period than a comparable fixed rate deal. But it is what happens thereafter which is the interesting thing.
24 Comments
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1. drewster said...
A selection of comments below the article:
"This article ignores the fact that many trackers have no early redemption penalties. Even if long-term fixed rates rise, it should be possible to switch to a reasonable fixed or capped rate later if you should want to, without costing a fortune in the long run." [Err, won't fixed rates be higher then?]
"I predict a run on Sterling and rates will have be hiked to hold the line. Sterling is very vulnerable and with economic growth stagnant for the next decade there is no other way."
"In Japan they have 100 yr mortgages which can be passed on to relatives when you die!"
"My mate has a tracker mortgage. His payments went from £2,000 per month to £200. He loves this recession! What has he done with the extra £1,800 per month? He’s borrowed more and bought a flat in London for his kids!"
2. quiet guy said...
A logical and amusing post, Drewster.
My contrarian comment is that the debt based boom has already lasted years longer than most of us expected so let's be patient. I suspect that the low rates may last longer than seems reasonable, at the moment.
3. tenyearstogetmymoneyback said...
drewster wrote
"In Japan they have 100 yr mortgages which can be passed on to relatives when you die!"
How incredibly sensible. In the U.K. loads of people have interest only mortgages which won't be paid off in a thousand years let alone a hundred.
From the original article
"If they are right, then a good tracker ought to cost less over a two to three year period than a comparable fixed rate deal."
And what happens at the end of the two years ?
When the Government was talking about trying to get people on to fixed term mortgages most people thought they mean't the
American style ones where I believe the fix is for the entire term of the mortgage. Anyone like to predict where interest rates will
be in fifteen years time ?
4. paul said...
I don't think interest rates will stay that low for long. Of course the government would like them to, but as the housing market falters again, they won't be able to resist throwing more taxpayer money at it. When that happens, the markets will twig what the government is trying to do (reflate the housing bubble at the expense of the economy) and will walk from sterling sending it crashing to unprecedented lows.
The Bank of England will go into its usual panic mode and have crisis meetings and raise rates but 'instruct' mortgage lenders not to raise their mortgage rates. The lenders won't obey and jack up rates, leaving the overmortgaged where they rightly belong.
5. crunchy said...
The government are now cornered. When sterling takes the next leg down there is nothing the BOE can do about it unless the banks and
taxpayer are prepared to take another hit due to mortgage revenue losses. I can already see manipulation with sterling. HOW LONG CAN
IT LAST.
6. drewster said...
Articles like this one have been saying for a while now that the BoE will have to stop raising rates sooner or later. However what if they don't? What if they turn to other tricks, like forcing the banks (which they now own) to buy up gilts as an alternative to QE? How far will they let the pound fall to protect nominal house prices?
7. tenyearstogetmymoneyback said...
drewster
The question is how far can they let the pound drop without causing panic amongst investors (both UK and international).
Many international investors must be sitting on 30% losses already. there are plenty of other countries for them to invest
their money in.
8. mark wadsworth said...
Drewster: "What if they turn to other tricks, like forcing the banks (which they now own) to buy up gilts as an alternative to QE?"
That's already in the pipeline! Not only are they going to reverse QE, but they will ask banks to invest in more "high quality assets", to wit UK government bonds (glossing over the fact that's the assets side, nobody's bothere about the assets side, the real argument is over who should take the pre-existing losses on the chin - the borrower, the shareholders, the bondholders or the taxpayer?).
And they can easily tweak pension fund rules to make them invest more in "high quality assets" (to wit, UK government bonds).
And don't forget all the other things they can do (scrap council tax, lift SDLT threshholds, increase mortgage interest subsidies, increase housing benefit for slumlords, complete ban on new construction, make it illegal to ever repossess a Hallowed Home-Owner etc etc).
Now we've seen how determined they are - and to be fair how successful they've been - they could keep the bubble inflated for years longer.
9. jack c said...
Valid points raised by MW (Friday, December 18, 2009 10:27AM) regarding what is likely in the pipeline - this from today's Citywire
Banking stocks are under pressure again in morning deals as documents from the Basel Committee on Banking Supervision and from the Bank of England re-sparked concern banks will need to do more to shore up their finances against a future crisis in the new tighter post-crunch regulatory environment to quote Mark "banks to invest in more "high quality assets", to wit UK government bonds"
Full story (which varies significantly from that of the BBC) @www.citywire.co.uk/personal/-/news/markets-companies-and-funds/content.aspx?ID=373775
10. techieman said...
MW - "they could keep the bubble inflated for years longer". Aha so even the most bearish of the bears on here is now contemplating a bullish resolution? Good! It sounds like we are about to lurch to the next down leg early next year. Some end of year good news (or rather news thats bad but not as bad as expected) will probably buoy the markets. I reviewed the technicals with Le Crunch on Wenesday. I think the pound looks sound against the Euro for a while.
$ appreciates against both - after the retracement toward the top (which should be shallowish) - but against the Euro more than against the pound, meaning that the pound appreciates on the cross rates.
11. jack c said...
techieman - I've noticed quite a few people on here getting very frustrated and one or two have indeed taken the plunge into buying which after very careful consideration has further re-inforced my bearish stance (enter smugdog stage left)
12. techieman said...
yes Jack - the issue is that property as you have said is the most illiquid asset class, so movements in prices are (normally notoriously slow). Any bubble in property is likely to find an interim floor. People then get sucked into thinking - we want to get in quick since the bottom is in - and we dont want to miss an opportunity to get something we only just cant afford (since later we wont be able to afford it at all). Increasing prices provide momentum for that thinking - which is why i have often said (probably to the point of being boring) that the bull move off the early 2009 lows will probably go further in both time and price than most expect.
At a point though the price goes back to being prices they cant afford at all (the ones that are left in the market). With buyers drying up unless there is no substitute demand - then even if supply stays constant (no forced sellers) prices must fall albeit slowly and at the margins. (whether or not that is reflected in the indexes - which is a reason why the indexes arent really tradable because they are not "fungible" with the real world). If you add forced sellers then the prices will fall quite precipitously, particularly because buyers will withdraw their bids and bid under the market.
Of course then this all depends on whether the momentum "suck in" as i call it can be maintained. I suppose you could argue that if it is maintained then by definition it wont be a suck in.
The other issue with property illiquidity is transaction costs. This means that people are reluctant to STR - particularly if the prices have fallen so far, so you dont get so much heard mentality as you do in the markets. The moves made can look similar but over different timespans. You would probably see similarities between a OHLC annnual chart with a property monthly chart. (thats just a gut instinct i havent looked at that specifically - and would be happy to concede on that point).
13. mark wadsworth said...
@ Techie, 10. I've not turned bullish, house prices have a long way to fall, what's hacking me off is how slowly it's going - three years @ 15% year would have suited me just fine - bearing in mind I have to keep Her Indoors at bay all the while.
I cannot rule out that we end up like Japan and prices just drift downwards for a decade or two - provided they are falling at about 5% a year, that nets off with the rent we pay, so I'm not too bothered but Her Indoors is (she's world champion at notional costing in an exam situation but fails to accept that the same rules apply in real life).
14. techieman said...
MW i was only having a bit of Christmas fun - i realise you havent turned bullish - it was just your turn of phrase that got me thinking.
Re her indoors best buy her a very nice expensive christmas present (not a house). Wouldnt that keep her quiet for a few days / weeks/ months??
15. techieman said...
... i assume you have already bought the Ricardos Law book and put it on her side of the bed as a subtle hint!
16. mark wadsworth said...
@ Techie, my claim to fame is that my Bow Group tax simplification report is mentioned on page 189 in the footnotes of that book.
There was a TV programme about the origins of the board game Monopoly, and how it was in fact derived from a Georgist morality game (called The Landlord's Game) which tried to show how unfair things were with land-ownership and rents and how it turned people into monsters (and the game unarguably does). They said that LVT had been a hot topic in the UK before WW1 and I pointed out to Her Indoors that the main reason WW1 started was to keep the masses in their place and take their minds off LVT.
She retorted that she would start WW3 if I ever mentioned LVT again.
17. jack c said...
techieman - thanks for the response/input - I'm repeating myself here but I think the Silver Bullet in all of this is an inevitable rise in interest rates. The Government/BOE will try to maintain rates at artificially low levels for as long as possible however I think the markets will ultimately dictate that rates rise and maybe sooner than most anticipate.
18. techieman said...
...so you mentioned it once but you think you got away with it?
[i assume you know the quote?] http://www.youtube.com/watch?v=t1O41RIKKDo&feature=PlayList&p=65DE563358137B2F&playnext=1&playnext_from=PL&index=8
19. techieman said...
Jack - i agree that will happen but not as quickly as you might think - if you are alluding to the base rate, and i dont think it will be the main driver. The gap between base and real rates may get bigger as the market forces it to. That would be consistent with falls in the pound (which i do see eventually - i.e. Euro parity plus ) but short term i see the pound being stronger v. the Euro. But i hope it is sooner rather than later.
20. jack c said...
techieman - I was alluding to the base rate and have approximate 6 month timescale in mind.
21. matt_the_hat said...
I have finally capitulated and had an offer accepted on an apartment - god help me
22. techieman said...
Jack @20 yes that sounds a reasonable span (although the markets will probably be discounting that and force the government into it).
However i think (and sincerely hope) we will be some months down the next leg of the bear market by then, and that will be a mere catalyst for further falls (of course the liklihood of such a move would already be discounted so part of this move could be a cause of prior falls too).
23. techieman said...
Matt - we could all be wrong of course. I hope you are happy there and have a great Christmas.
24. garch said...
This country has probably never been more short interest rates. Pretty clear where the pain trade is...