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TheEmperorHasNoClothes

What Could Cause Interest Rates To Rise?

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A question for all the financial analyst types out there ... Dr Bubb et al...

My opinion is that the HPC will cruise at the current speed 10-15% per year for several years for the obvious reasons of increasing unemployment, wrecked economy, still at very high prices etc. Thats good for a renter like me, but it doesn't seem fast enough given the magnitude of what is going on.

I think the "savior" of the market at the moment (in the sence of it preventing a very nasty crash) is the 0.5% base rate. I can't see the goverment willingly raising that anytime in the next hmmm 5 years? And perhaps its a wise move not to.

But surely there must be some situations that would force it to go up? Threat of currency collapse? Very high inflation? How likely are these? Would anyone bet money on the base rate being > 3% next year?

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Massive demand in the form of govt borrowing will by definition require higher returns to encourage an equal level of supply. This equals higher interest rates. This crowds out the commercial sector who will have to also offer higher interest rates to get any share of the pie. They in turn will pass this onto borrowers as banks need to lend for higher IRs than they borrow at (obviously).

Other factors like increased risk of default and fear of higher inflation will also lead to lenders demanding higher interest rates. This applies to both govt and private borrowing.

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My opinion is that the HPC will cruise at the current speed 10-15% per year for several years

10-15% sounds pretty dramatic to me. Considering your sig, this sounds uber-bearish!

One likely cause of a rise in IRs would be the increasing difficulty the government might have selling debt, i.e. borrowing money. If lenders become reluctant to lend the government money for whatever reason then the government would have to pay more interest to tempt them to. This will be reflected in higher IRs throughout the economy.

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Foreign investors needing higher rates for the risk of lending to overburdened economies. 15% minimum.

Interest rates is the only thing that has stopped prices coming off a cliff. We were heading for 500,000 BTL investments being repossessed.

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10-15% sounds pretty dramatic to me. Considering your sig, this sounds uber-bearish!

One likely cause of a rise in IRs would be the increasing difficulty the government might have selling debt, i.e. borrowing money. If lenders become reluctant to lend the government money for whatever reason then the government would have to pay more interest to tempt them to. This will be reflected in higher IRs throughout the economy.

He he I didn't mean 10-15% forever! And of course it's 10-15% of a smaller pie each year. I think the biggest £ falls per year (i.e. 40k avg. may be over).

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Foreign investors needing higher rates for the risk of lending to overburdened economies. 15% minimum.

Interest rates is the only thing that has stopped prices coming off a cliff. We were heading for 500,000 BTL investments being repossessed.

:blink:

The blink is for the tennants (many of which will be families) who may get evicted because of the BTL repos if that scenario comes true.

Edit:

+ thanks guys for reassuring me to stay renting ... it's tough being a bear a times and i'd love to own a house. I need to convince the GF too that it's best to stay renting. My current idea on that is to show how much bigger the house we can rent would be than the house we'd buy and call it "living for the moment"! Any argument about interest rates would have the response (perhaps understandably) or "well how do YOU know?...."

Edited by TheEmperorHasNoClothes

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A question for all the financial analyst types out there ... Dr Bubb et al...

My opinion is that the HPC will cruise at the current speed 10-15% per year for several years for the obvious reasons of increasing unemployment, wrecked economy, still at very high prices etc. Thats good for a renter like me, but it doesn't seem fast enough given the magnitude of what is going on.

I think the "savior" of the market at the moment (in the sence of it preventing a very nasty crash) is the 0.5% base rate. I can't see the goverment willingly raising that anytime in the next hmmm 5 years? And perhaps its a wise move not to.

But surely there must be some situations that would force it to go up? Threat of currency collapse? Very high inflation? How likely are these? Would anyone bet money on the base rate being > 3% next year?

Mortgage rates are already rising. Fixed rates over 5% now.

Base rates might go up as QE kicks in, or a bond strike.

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I think the "savior" of the market at the moment (in the sence of it preventing a very nasty crash) is the 0.5% base rate. I can't see the goverment willingly raising that anytime in the next hmmm 5 years? And perhaps its a wise move not to.

It seems you got most of the answers already. Id just like to add maybe that some people seem to confuse BoE rate (the 0.5% you alude to) with government debt rates (or even think they are the same). As you saw from the response, BoE lending may very well stay at 0.5% but government debt rates will more likely than not make private fixed debt rate go up... and that will have a direct impact on fixed rate mortgages.

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Would anyone bet money on the base rate being > 3% next year?

It is irrelevant. Just like shouting "green shoots" does not mean much or Brown's not so distant assessment of the UK's prospects to weather the bust.

Governments unfortunately can influence prices of certain factors in the short run, including the cost of debt or capital by distorting the market, but sooner or later the free market forces establish the true cost or price for something. Commanded rate can be anything; market rate can be very much diffeent. Just look back to last autumn to see what happened to money market rates after Lehman, but before the govies intervened and printed some money to sustain its supply.

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I think the "savior" of the market at the moment (in the sence of it preventing a very nasty crash) is the 0.5% base rate. I can't see the goverment willingly raising that anytime in the next hmmm 5 years? And perhaps its a wise move not to.

But surely there must be some situations that would force it to go up? Threat of currency collapse? Very high inflation? How likely are these? Would anyone bet money on the base rate being > 3% next year?

I agree the low rate is propping up the market. The fact that its 0.5% and there's been little sign of inflation taking off or currency collapse suggests it could stay low for ages, as long as other countries do the same.

Meanwhile, rates on new mortgages are being put up by the banks. This makes it harder for new FTBs etc. That should put some downward pressure on the market but potential sellers don't need to sell if they're on trackers etc. The over-extended BTL landlord can carry on without a forced sale as long as interest rates for his/her specific mortgage are low.

Seems to me the future is of long term static prices and low volumes. Less people can afford to get on the first rung due to higher rates for new borrowers, but less people have reason to sell if BOE rate and SVR remains low.

The end conclusion of those on HPC who want their first home or to upgrade seems that, waiting for a crash is not going to be the solution, saving up a larger deposit (despite low savings rates) is the answer. This means forgo the car, overseas holiday etc. For those unlucky people that say, I can't save despite going without those things due to low wages or whatever, well, probably little future in the UK and these people should look at emigration as the best way to any standard of living. Sorry, this is grim, but seems to me realism ....

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I agree the low rate is propping up the market. The fact that its 0.5% and there's been little sign of inflation taking off or currency collapse suggests it could stay low for ages, as long as other countries do the same.

Inflation could well be on the rise again soon - petrol price is going up again. Without the VAT cut it would be 1% higher than the already fiddled CPI figures. That would mean it's actually still been more than 50% above the official target throughout the financial crisis and recession.

You have to watch what they do. They can say all they like about inflation in the media, the only thing the BoE cares about is asset price denflation and doing all they an to prevent it.

We are controlled by liars and thieves.

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10-15% sounds pretty dramatic to me. Considering your sig, this sounds uber-bearish!

The historical norm is 8-12% I believe.

The stupidly low rates we've had for the last 10-15 years can't continue, as no-one in their right mind would lend money at 5%. They've been low for 10-15 years because you've had Spivs lending OTHER PEOPLES moeny at 5% in exchange for what were essentially, kickbacks.

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IMeanwhile, rates on new mortgages are being put up by the banks. This makes it harder for new FTBs etc. That should put some downward pressure on the market but potential sellers don't need to sell if they're on trackers etc. The over-extended BTL landlord can carry on without a forced sale as long as interest rates for his/her specific mortgage are low.

Seems to me the future is of long term static prices and low volumes. Less people can afford to get on the first rung due to higher rates for new borrowers, but less people have reason to sell if BOE rate and SVR remains low.

Seems to me you only consider tracker rates going up as the only source for increasing supply or accelerate sales. Hence your static view. I think we do not have to forget there are other reasons why the process may accelerate, and that is job losses, companies going to administration and the general economy horizon continuing deterioration. In other words, irrespective of tracker rates forced sales may be on the up.

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There's so much spare capacity in the labour markets, in production capacity globally and global demand is still really weak. That'll keep a lid on inflation. Political will for globalisation continues so no return to protectionism (and with it higher prices).

Even the CPI is close to target now

http://www.statistics.gov.uk/cci/nugget.asp?ID=19

Do you think the economy will recover or will we get a Japan style slump?

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He he I didn't mean 10-15% forever! And of course it's 10-15% of a smaller pie each year. I think the biggest £ falls per year (i.e. 40k avg. may be over).

Are you a cash buyer? If so then stay out of the housing market.

Do you need a mortgage? If so then consider buying.

One of the things that is being lost in this debate on increasing interest rates and the effect on the housing market is what your repayments are going to be. Yes, the capital value will decrease as a result of interest rates rising but conversley your mortgage payments are going to increase. You have to weigh up the destruction side versus the cash flow side.

On a £200,000 mortgage for every 0.5% increase in the rate you would need to deduct approximatley £1000 per year off the purchase price of the house you end up buying, today. So, over a 25 year term you need to deduct a further £25k to get the same deal.

So, right now you get 20% off and lock in for 4.99% you have got a good deal, money is cheap right now and reading your own posts suggests you see interest rates only going one way.

Of course the housing market has further to correct but the reason I have switched from bear to neither is because buying now could be the right decision for people in certain circumstances.

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Seems to me you only consider tracker rates going up as the only source for increasing supply or accelerate sales. Hence your static view. I think we do not have to forget there are other reasons why the process may accelerate, and that is job losses, companies going to administration and the general economy horizon continuing deterioration. In other words, irrespective of tracker rates forced sales may be on the up.

Fair point, but don't forget its only a tiny minority who, on losing a job , have a forced sale next month. (I admit this will probably go up).

People will cut back on a lot of things before they fail to pay a mortgage which they know will result in the roof over their head being threatened.

Presumably you'd see big route cuts, losses even, by the likes of Ryanair & Easyjet before you see mass forced sales, as people will cut their holidays first. Maybe thats an indicator.

I don't dispute that ultimately job losses may cause a surge in forced sales which could push house prices down despite lack of increase in interest rates, but, seems to me we've yet to see much of that playing out.

Also in that situation the economy would be v bad, and buying a house may seem risky to a lot of HPCers in fear for their jobs.

In which case, ironically, my argument of "save like mad first" still stands as you then need to minimise your mortgage not just because you don't want to be a debt slave but also because you have very real fear for employment prospects...

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the answer is easy A SAVERS REVOLT but its getting everybody to unite and take action thats the problem in this country, all we have to do is pick a major bank say barclays and then cause a run on the bank get every saver no matter how much you have in an account to withdraw the cash causing it to go bankrupt then threaten to do the same to each one until interest rates are returned to normal, its about time something was done to help us savers instead of keeping the interest rates low to help the idiots that caused this whole mess as low rates are doing more long term damage to this countries long term economy as once the jobs and companies have gone we will be very lucky if 50% of them return when this is all over , brown is going to make this a very long drawn out affair where as if property prices were allowed to crash 50% quickly more jobs could have been saved, i know i would rather have a house worth 50% less and still have a job to pay for it then no job at all and lose the house anyway, the other problem is why brown wants to keep property prices high it's got nothing to do with the general public losing money it's all about preserving his and his fellow m.p's and his rich friends wealth as they all have their fingers stuck in the property pie right up to their knuckles and the taxpayer will be paying for it for many years to comejust so they can live a life of luxury

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the answer is easy A SAVERS REVOLT but its getting everybody to unite and take action thats the problem in this country, all we have to do is pick a major bank say barclays and then cause a run on the bank get every saver no matter how much you have in an account to withdraw the cash causing it to go bankrupt then threaten to do the same to each one until interest rates are returned to normal, its about time something was done to help us savers instead of keeping the interest rates low to help the idiots that caused this whole mess as low rates are doing more long term damage to this countries long term economy as once the jobs and companies have gone we will be very lucky if 50% of them return when this is all over , brown is going to make this a very long drawn out affair where as if property prices were allowed to crash 50% quickly more jobs could have been saved, i know i would rather have a house worth 50% less and still have a job to pay for it then no job at all and lose the house anyway, the other problem is why brown wants to keep property prices high it's got nothing to do with the general public losing money it's all about preserving his and his fellow m.p's and his rich friends wealth as they all have their fingers stuck in the property pie right up to their knuckles and the taxpayer will be paying for it for many years to comejust so they can live a life of luxury

Naah the government would bail the bank out.

You are right though, had market forces been aloud to rule then the crash would have been quicker sharper and over a lot quicker. But, this one is going to be long and drawn out, and most of the correction from here on in will be inflationary in anycase.

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Guest happy?
....My current idea on that is to show how much bigger the house we can rent would be than the house we'd buy and call it "living for the moment"! Any argument about interest rates would have the response (perhaps understandably) or "well how do YOU know?...."

The problem that someone renting faces is one of when to join the market. There are a lot of naive people on here who think that there will be a straight-line crash at which point they can then walk into any bank get a mortgage and take their pick from the estate agents window.

It ain't gonna happen like that. If you're a cash buyer things may work out this way. For those with a deposit and a mortgage to secure it will mostly be a fine judgement between falling prices and rising interest rates. You will find in practice that the rise in interest rates will lead to more repossessions and lower prices but that overall cost to borrowers will be higher. You may will also find that banks continue to be reluctant to lend and whilst you can secure agreement to buy you will spend many fruitless weeks trying to secure a loan. You may find several times that you've agreed, paid-out survey fees, but cannot complete and the property goes to someone else.

The market has now changed permanently. Expect conditions similar to the 1970's housing market - where there were few overseas lenders and little competition between mostly reluctant lenders.

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For those with a deposit and a mortgage to secure it will mostly be a fine judgement between falling prices and rising interest rates. You will find in practice that the rise in interest rates will lead to more repossessions and lower prices but that overall cost to borrowers will be higher.

Precisely, and that is why the OP overall message to save like mad now and in the next few years is bang on target.... if you want a house minimize your debt requirements while adding to potential equity as house prices are still going south.

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A question for all the financial analyst types out there ... Dr Bubb et al...

My opinion is that the HPC will cruise at the current speed 10-15% per year for several years for the obvious reasons of increasing unemployment, wrecked economy, still at very high prices etc. Thats good for a renter like me, but it doesn't seem fast enough given the magnitude of what is going on.

I think the "savior" of the market at the moment (in the sence of it preventing a very nasty crash) is the 0.5% base rate. I can't see the goverment willingly raising that anytime in the next hmmm 5 years? And perhaps its a wise move not to.

But surely there must be some situations that would force it to go up? Threat of currency collapse? Very high inflation? How likely are these? Would anyone bet money on the base rate being > 3% next year?

In one line - When the govt stops buying its own debt they will rise.

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The problem that someone renting faces is one of when to join the market. There are a lot of naive people on here who think that there will be a straight-line crash at which point they can then walk into any bank get a mortgage and take their pick from the estate agents window.

It ain't gonna happen like that. If you're a cash buyer things may work out this way. For those with a deposit and a mortgage to secure it will mostly be a fine judgement between falling prices and rising interest rates. You will find in practice that the rise in interest rates will lead to more repossessions and lower prices but that overall cost to borrowers will be higher. You may will also find that banks continue to be reluctant to lend and whilst you can secure agreement to buy you will spend many fruitless weeks trying to secure a loan. You may find several times that you've agreed, paid-out survey fees, but cannot complete and the property goes to someone else.

The market has now changed permanently. Expect conditions similar to the 1970's housing market - where there were few overseas lenders and little competition between mostly reluctant lenders.

Bump

Unfortunately buyers are going to have to tough it out and as happy? says, risk some survey money and put up with high fixed rates for some time.

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Precisely, and that is why the OP overall message to save like mad now and in the next few years is bang on target.... if you want a house minimize your debt requirements while adding to potential equity as house prices are still going south.

erm if it were oh so simple.

Lets assume 3% increase in interest rates on £200,000 loan over a 'few years'. That is the equivalent to having to save £60,000 (equal to 10 years at 4.99% + 3%). So, you either save like fook (if possible £60,000) or get a further £60,000 knocked off your house price, which is equivalent to another 20% reduction in house prices nominally either way you are no better off. This all assumes of course a nominal correction. For interest rates to rise we should see a correlating increase in inflation (which is where we are heading), if this inflation translates into wage inflation then house prices would hold up better.

If you need to borrow to buy now is as good a time as any, it is a much finer line than people would care to admit.

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If you need to borrow to buy now is as good a time as any, it is a much finer line than people would care to admit.

The next 9 months is absolutely going to be the window for buying.

Have you thought of calculating the IR rises required to break even versus further falls and making a thread on the topic??

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