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Optobear

It Is All In The Yield Curve

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Surely the yield curve:

http://www.bankofengland.co.uk/statistics/yieldcurve/

Tells us pretty much the consensus view of what is going to happen. It is clear that the UK will see interest rates at 0.5% for the next two years, and then the market assumes a return to 5% rates over the following three years. That surely suggests that the economy, and therefore house prices won't recover to growth for getting on for five years?

I haven't posted much recently, but when hpc was about waiting for the crash, I felt a real sense of intellectual curiosity about when it would happen, how it would happen, and why others were all in denial. We are now well into the crunch / crash / recession / depression, and we just have to wait until the world grinds its way out. Ignore all the press, all the "green-shoots", all the silly government schemes. There is no real "uncertainty" about what will happen, or when it will happen, just wait and watch.

When in recession, and with a yield curve like that, the markets ain't going to be far wrong!

Optobear

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Guest absolutezero

Bump.

This is THE indicator as far as I'm concerned.

Not sure why it was wallowing on page 4 of the main board, hence my bump.

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Bump.

This is THE indicator as far as I'm concerned.

Not sure why it was wallowing on page 4 of the main board, hence my bump.

I wouldn't disagree with the idea that interest rates won't rise sharply short term and won't be north of 5% for 5 years.

I wouldn't disagree with the idea that the housing market will see no growth in prices for 5 years vs where we are now.

What of course I am not sure about is during the intervening time will we see sharp drops and a sharp bounce back or a gradual decline and then flatening.

Whichever route we follow I wouldn't be surprised if prices are still lower than today in five years, the route we folow doesn't much matter to me but will to those who want to buy and are desperate to see sharp falls and a genuine bottom to the market as far below trend as possible.

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Tells us pretty much the consensus view of what is going to happen. It is clear that the UK will see interest rates at 0.5% for the next two years, and then the market assumes a return to 5% rates over the following three years.

Not certain rates will be as high as 5%, don't think the debt is sustainable at that level. I would suggest any increase in rates would top out at 3.5% - 4%.

Someone needs to create debt sustainability models to see what rate of interest is economically sustainable.

I think the debt problems we have are going to be around for a very long term meaning high interest rates can't be achieved unless you get wage growth, but this causes all sorts of other problems.

Even at 3.5% wouldn't that equate to a 700% increase in the base rate?

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Can I refer you to the BOE fan charts for GDP 'growth' from, let's say early 2008. (I'm sure some one can post the linky).

I would suggest that this is conclusive proof that the BOE do not know their arses from their elbows.

Edit

http://www.bankofengland.co.uk/publication...ort/ir08may.pdf

Check out the 'bad boy' fanchart on page 9, from just over a year ago.

I wouldn't let this lot work on my shopping budget !!!!!!!!

:lol::lol::lol::lol:

Edited by RDW

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Surely the yield curve:

...

Tells us pretty much the consensus view of what is going to happen. It is clear that the UK will see interest rates at 0.5% for the next two years, and then the market assumes a return to 5% rates over the following three years. That surely suggests that the economy, and therefore house prices won't recover to growth for getting on for five years?

...

When in recession, and with a yield curve like that, the markets ain't going to be far wrong!

Optobear

Just yesterday I heard Peter Schiff, talking about the U.S. housing market, say that the market will not

find a bottom until interest rates find a peak.

And as you say that seems to be a few years off.

On edit: and not to mention the future age demographics. The bottom in real

(as opposed to nominal) houses prices may be years further into the future and lower

than many, even here on HPC, anticipate.

Edited by wren

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Not certain rates will be as high as 5%, don't think the debt is sustainable at that level. I would suggest any increase in rates would top out at 3.5% - 4%.

Someone needs to create debt sustainability models to see what rate of interest is economically sustainable.

I think the debt problems we have are going to be around for a very long term meaning high interest rates can't be achieved unless you get wage growth, but this causes all sorts of other problems.

Even at 3.5% wouldn't that equate to a 700% increase in the base rate?

Not sure it matters whether the debt is sustainable for home owners, what matters is what foreign investors will demand for sterling denominated treasury debt. The numbers show 5% - and that is for gilts - so it would put real rates at 7-10% for mortgage borrowers, and that would be bang on the long term (30 year) average.

The fact that rates would have to rise by 600% (to get to 3.5%) reflects simply that we don't have a properly (if it ever was properly) operating economy. The treasury sell the gilts, the BoE buy the gilts, the 0.5% is to prevent banks collapsing afresh, it is a purely nominal figure, and does not indicate the sterling risk even.

The QE to date has been to replace the fiat money vanishing from the system as lending falls, once that stabilises, we'll be back to gilt rates that compensate for risk (currency and inflation in the case of gilts), and that will push to 5% (ish). Or at least that is what the yield curve shows.

Of course that same yield curve explains why a short-term cash ISA only pays 0.2%, while a 3 or 5 year fixed terms will pay around 4%... Hence, btw, it doesn't matter much whether you put cash in for 1 year now (at 0.2%) and then reinvest later when rates rise. Once the QE starts to reverse - and the BoE are trying to sell gilts, then the demand for cash will be much greater, and interest rates on deposits will be well over 5%.

It is all in the yield curve.

Optobear

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Surely the yield curve:

http://www.bankofengland.co.uk/statistics/yieldcurve/

Tells us pretty much the consensus view of what is going to happen. It is clear that the UK will see interest rates at 0.5% for the next two years, and then the market assumes a return to 5% rates over the following three years. That surely suggests that the economy, and therefore house prices won't recover to growth for getting on for five years?

I haven't posted much recently, but when hpc was about waiting for the crash, I felt a real sense of intellectual curiosity about when it would happen, how it would happen, and why others were all in denial. We are now well into the crunch / crash / recession / depression, and we just have to wait until the world grinds its way out. Ignore all the press, all the "green-shoots", all the silly government schemes. There is no real "uncertainty" about what will happen, or when it will happen, just wait and watch.

When in recession, and with a yield curve like that, the markets ain't going to be far wrong!

Optobear

The yield curve tells us what the current price of money is. At the moment, the cost of borrowing money for 5 years is 5%. The may imply a degree of prediction as to what might happen to short-term interest rates over that time.

But either way, what is the link between the current yield curve and a recovery in house prices? You have not stated why one is so strongly linked to the other.

And for what its worth, if the 5 year yield is at 5% and short-term interest rates are closer to 1%, it is implied that short-term rates in 5 years time would be higher than 5% - there would otherwise be an arbitrage opportunity to borrow short and invest in the 5 year paper.

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The yield curve tells us what the current price of money is. At the moment, the cost of borrowing money for 5 years is 5%. The may imply a degree of prediction as to what might happen to short-term interest rates over that time.

But either way, what is the link between the current yield curve and a recovery in house prices? You have not stated why one is so strongly linked to the other.

And for what its worth, if the 5 year yield is at 5% and short-term interest rates are closer to 1%, it is implied that short-term rates in 5 years time would be higher than 5% - there would otherwise be an arbitrage opportunity to borrow short and invest in the 5 year paper.

Read this...

The Baby Boom and Predictability in house prices and interest rates

http://www.rfmartin.com/images/Baby_Boom_RFMartin.pdf

If you dont bother, then dont bother questioning the link between the yield curve and house prices.

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Read this...

The Baby Boom and Predictability in house prices and interest rates

http://www.rfmartin.com/images/Baby_Boom_RFMartin.pdf

If you dont bother, then dont bother questioning the link between the yield curve and house prices.

page 46....shows the HPI boom should ended 2005...

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page 46....shows the HPI boom should ended 2005...

Oh it insanely assumes housing exists in a market, but it's still good stuff.

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Not sure it matters whether the debt is sustainable for home owners, what matters is what foreign investors will demand for sterling denominated treasury debt. The numbers show 5% - and that is for gilts - so it would put real rates at 7-10% for mortgage borrowers, and that would be bang on the long term (30 year) average.

The fact that rates would have to rise by 600% (to get to 3.5%) reflects simply that we don't have a properly (if it ever was properly) operating economy. The treasury sell the gilts, the BoE buy the gilts, the 0.5% is to prevent banks collapsing afresh, it is a purely nominal figure, and does not indicate the sterling risk even.

The QE to date has been to replace the fiat money vanishing from the system as lending falls, once that stabilises, we'll be back to gilt rates that compensate for risk (currency and inflation in the case of gilts), and that will push to 5% (ish). Or at least that is what the yield curve shows.

Of course that same yield curve explains why a short-term cash ISA only pays 0.2%, while a 3 or 5 year fixed terms will pay around 4%... Hence, btw, it doesn't matter much whether you put cash in for 1 year now (at 0.2%) and then reinvest later when rates rise. Once the QE starts to reverse - and the BoE are trying to sell gilts, then the demand for cash will be much greater, and interest rates on deposits will be well over 5%.

It is all in the yield curve.

Optobear

The dilemma is if you push up interest rates you will create defaults. Create a large enough default on the consumer level the national economy will collapse.

It's a catch 22 situation, we have a huge debt overhang so we are at huge risk of default, but pushing up interest rates ensures the default.

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Oh it insanely assumes housing exists in a market, but it's still good stuff.

yes, I did query that aspect in the Agent formula for the working age ratio map on page 26.

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The dilemma is if you push up interest rates you will create defaults. Create a large enough default on the consumer level the national economy will collapse.

It's a catch 22 situation, we have a huge debt overhang so we are at huge risk of default, but pushing up interest rates ensures the default.

Yes, quite agree. Remember Gordon said "No more boom and bust"?

My point was that the government will be forced to raise interest rates when they have to start unwinding QE. That will lead to defaults, but, and this is important, only for those with huge mortgages. Those with 50% mortgages will be okay.

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Yes, quite agree. Remember Gordon said "No more boom and bust"?

My point was that the government will be forced to raise interest rates when they have to start unwinding QE. That will lead to defaults, but, and this is important, only for those with huge mortgages. Those with 50% mortgages will be okay.

I hope to god you are correct with that figure 50% LTV now, or do you mean those who end up with 50% mortgages after the collapse has finished?

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I hope to god you are correct with that figure 50% LTV now, or do you mean those who end up with 50% mortgages after the collapse has finished?

50% LTV from the peak = about 90% to 100% mortgage at the trough, but if you are not just on interest only, and are repaying, then 50% LTV from the peak will be fine... probably.

Isn't that why banks only really want to do 75% LTV now even after we've seen about 25% in falls?

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50% LTV from the peak = about 90% to 100% mortgage at the trough, but if you are not just on interest only, and are repaying, then 50% LTV from the peak will be fine... probably.

Isn't that why banks only really want to do 75% LTV now even after we've seen about 25% in falls?

Why does the LTV directly correlate with defaulting?

Surely the only reason for default is not paying the mortgage, that can happen for any LTV ratio and conversley a 125% mortgage can still be paid if the mortgagee has the readies. Negative equity is only an issue if you have to sell.

New loans are different as the banks just don't want the *risk* of losing money - not the same as actually losing it.

What else am I missing?

cheers

J

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Why does the LTV directly correlate with defaulting?

Surely the only reason for default is not paying the mortgage, that can happen for any LTV ratio and conversley a 125% mortgage can still be paid if the mortgagee has the readies. Negative equity is only an issue if you have to sell.

New loans are different as the banks just don't want the *risk* of losing money - not the same as actually losing it.

What else am I missing?

cheers

J

Yes the mortgage can be paid off, but why would you?

Especially if you were in it just to make money and not buying a house just to live in. There comes a point where bankrupcy and a re-boot is more finanically attractive than carrying on with a failed investment.

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Why does the LTV directly correlate with defaulting?

Surely the only reason for default is not paying the mortgage, that can happen for any LTV ratio and conversley a 125% mortgage can still be paid if the mortgagee has the readies. Negative equity is only an issue if you have to sell.

New loans are different as the banks just don't want the *risk* of losing money - not the same as actually losing it.

What else am I missing?

cheers

J

It could be that if you have a low LTV and get into trouble, you can sell up and have some cash. These may not be classed as defaults. A word with the lender to pay a nominal amount until you sell...

Also if you have a large mortgage, the chances are you have little or no savings to fall back on and maybe have racked up some other debts as well.

To have a low LTV, it probably means you are a little older and wiser.

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Read this...

The Baby Boom and Predictability in house prices and interest rates

http://www.rfmartin.com/images/Baby_Boom_RFMartin.pdf

If you dont bother, then dont bother questioning the link between the yield curve and house prices.

Hi ?...!

Thanks for this, much to ponder.

However, I wonder if you had a comment on some of the possible discrepancies - for example, UK prices should not have fallen until 2010 at the earliest, and more notably, "the model’s predictions for house prices [in Ireland] between now [2006] and 2010 are remarkable. Over this time period, the model predicts a further doubling of house prices."

This appears some way off the mark, according to http://www.statusireland.com/statistics/pr...Since-1996.html - and whereas the UK situation could be argued to be just slightly mistimed, the Irish situation looks completely contrary to the model.

I'd also be interested to learn if the modelled real interests etc for the period 2006-2009 have proved to be correct or not, but unfortunately I don't have enough knowledge in this area to be certain as to whether I'm comparing the right data. Anyone else got any insight?

thanks

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Hi ?...!

Thanks for this, much to ponder.

However, I wonder if you had a comment on some of the possible discrepancies - for example, UK prices should not have fallen until 2010 at the earliest, and more notably, "the model’s predictions for house prices [in Ireland] between now [2006] and 2010 are remarkable. Over this time period, the model predicts a further doubling of house prices."

This appears some way off the mark, according to http://www.statusireland.com/statistics/pr...Since-1996.html - and whereas the UK situation could be argued to be just slightly mistimed, the Irish situation looks completely contrary to the model.

I'd also be interested to learn if the modelled real interests etc for the period 2006-2009 have proved to be correct or not, but unfortunately I don't have enough knowledge in this area to be certain as to whether I'm comparing the right data. Anyone else got any insight?

thanks

it strikes me as plausible the model didn't consider Irish irs being set by the EU, which would break down the demographics-interest-rates relationship the model builds on

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it strikes me as plausible the model didn't consider Irish irs being set by the EU, which would break down the demographics-interest-rates relationship the model builds on

Good point, although AFAICT, the punt was given a fixed rate to the ECU from 1999, and then the Euro was adopted in 2002. So it would seem a bit of a strange oversight to not even mention this, for a paper written in 2006.

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