A Question For You All, Bears, Bulls, Neithers...

[Guest pioneer31]

or do you believe that it won't and "somehow" we'll just bend the laws of finance and everything will come up smelling of roses. Will our currency somehow buck the trend and we'll stay at historical low IR's forever?

The Halifax and NW have produced "figures" which show a slight rise and everyone seems to be in a spin......

Am I the only one with the cool head? Please say I'm not......

[19 year mortgage 8itch]

I have no grounding in finance/economics whatsoever, so I am about as well qualified to say anything as, well, Gordon Brown and Alistair Darling.

I think they will will want to keep low IRs for the feelgood illusion of wealth and prosperity whilst using taxes to suck us dry and try to dampen the inflationary effects. The consequences of this plan I do not know but I doubt they're good.

[DisQ]

or do you believe that it won't and "somehow" we'll just bend the laws of finance and everything will come up smelling of roses. Will our currency somehow buck the trend and we'll stay at historical low IR's forever?

The Halifax and NW have produced "figures" which show a slight rise and everyone seems to be in a spin......

Am I the only one with the cool head? Please say I'm not......

You can only bend these laws or hide facts for so long the time is running out... evidence is all around us (US China Japan...) we are not immune

I am afraid smell of roses it won't be. There is no way out.

plan for the worst...no one knows how bad its going to be.

[singlemalt]

A flood of funny money and historically low IRs have basically stabilised the situation, and some people shout "salvation we're saved!".

An increase of interest rates or withdrawal of QE will be tantamount to taking someone off life support, it can go either way.

I suspect those in the 'inner sanctum' know exactly which way it will go hence why at the G20 the other day GBrown & ADarling were so freaked at the idea of a retrenchment of these measures by Germany, cos if they do it we have to and while their economy is showing signs of conciousness ours is still comatose.

[moneyfornothing]

It will take some co-ordination among the producer nations of the world .. the chinese, the indians, the oil producing gulf , russia .. if they decide not to look away as they are doing now .. the reality will change and till then the west will continue to milk them of all they can ..

[silver lining]

QE money was pumped money into the economy to encourage banks to lend.

As the economy recovers, banks will start lending just as they always did. No lending = no profits.

Interest rates will climb but slowly. At the same time the current wide spreads will narrow to more traditional levels.

It may be a bumpy ride for a while in 2010. But recovery will happen and life will go on.

House prices will neither fall or rise significantly.

[Bloo Loo]

QE money was pumped money into the economy to encourage banks to lend.

As the economy recovers, banks will start lending just as they always did. No lending = no profits.

Interest rates will climb but slowly. At the same time the current wide spreads will narrow to more traditional levels.

It may be a bumpy ride for a while in 2010. But recovery will happen and life will go on.

House prices will neither fall or rise significantly.

the majors are already lending at 2007 levels.

whats missing are the SPVs and sub lenders, who cannot exist without the commission sturctures provided by securitization.

This IS it folks...its not going to get easier, particularly has forclosures and defaults continue apace in the banking system as a whole.

Ad in next years PS cuts and tax rises, and we have a squeeze on incomes as well as interest rate rises to contend with as well.

[tpbeta]

Will our currency somehow buck the trend and we'll stay at historical low IR's forever?

My prediction, for what it's worth, is that IR's will stay low for at least 2 years from here, probably more. QE will be used intermittently in that period but won't cause inflation because it won't be terribly effective in increasing the money supply. Responsible households and companies will continue to pay down debt, more than offsetting the QE effect on the money supply, and stopping the banks from being able to lend except (by definition) to irresponsible or unsafe borrowers. That much is merely a description of what's happening now continuing into the future.

A gap will emerge between the property bubble countries (eg UK Ireland US Spain) who struggle to come out of recession and others who emerge more quickly. The latter will have to end their stimulus packages to avoid inflation, requiring the former (where they can) to devalue their currencies as an alternative stimulus.

Sterling will in the short term strengthen further until the second dip of the recession comes after the election and then drop sharply as austerity measures expose the recovery as government stimulated - the private sector debt will stop it from creating a real recovery. That drop in Sterling will help prevent the recession from causing too much pain to GDP. We may see a bit of a CPI surge until the second dip and then back to deflation.

House prices will begin to drift down in nominal terms after the election as unemployment increases supply and the banks come under more pressure to liquidate repossessed holdings. No big drop but a long boring slow slide with lots of little upswings and periods of stagnation.

So if you want to make money out of all this, sell sterling just before the dip - which should roughly coincide with the austerity budget of 2010. The HPC hasn't been cancelled, it's just been shifted to other quarters. That shouldn't be so surprising. Why would the powers see virtue in lining the pockets of poor young people?

[Sybil13]

If the Q has been asked in order to understand what will happen with the property market I am not sure that QE or interest rates rising are as significant as the fact that very few properties are selling due to, as Rightmove said in their recent HPI, "a new era of both caution and cherry picking".

Of course if interest rates start to rise it will naturally effect the market, but interest rates have been rising on new mortgage lending despite hitorically low BOE interest rates, and QE, of course has had an effect but I think most believe its effect has not been significant. CML at the start of the year predicted £145 billion mortgage lending this year (about 2/3rds down on 2007), and haven't changed that figure despite all the ramping on approvals / QE etc..

Indeed Rightmove's recent HPI said:

Miles Shipside, commercial director of Rightmove comments: “After several months of activity and price revving upwards from last winter’s low point, both will start to hit the limiter without more mortgage finance. In spite of pent up demand, the market and pricing is boxed in by restrictive lending criteria put in place to ration mortgages given the lack of funds available to lendersâ€....

...Future price and transaction growth is now controlled by the bottleneck of mortgage availability. This is unlikely to change for years to come, with the Centre for Economics and Business Research (CEBR) forecasting that mortgage application levels will recover slowly and remain well below the levels seen in the early part of this decade as far ahead as 2013. Even in 2013 the CEBR state that numbers will still be 24% below 2006 levels. This may well reflect a paradigm shift in access to mortgage lending.

While HSBC is the only major lender to have taken a more proactive stance and increased its market share, its reported average loan-to-value of circa 50% on new mortgage lending is a perfect illustration of the new era of both caution and cherry picking. Shipside adds: “Lenders are looking to remove as much risk as possible from their mortgage book. While the government’s left-hand is waving them on to lend to more home movers and small businesses, the right-hand is effectively flagging them down again by urging lenders to re-build balance sheets and improve capital adequacyâ€.

G20 last week brought up this whole issue of improving capital adequacy, currently in the UK one 90%LTV costs the lender 4 - 5x's more than a 60% LTV and leaves less money available for lending overall.

So whilst QE and Interest Rates do effect the market, this particulary market is, as RM said above, going to be capped by limited lending FOR YEARS TO COME , in a way that no other crash has been, and I think this is something that has been missing from people's thought processes this summer as they have got swept away by all this bullish sentiment, but I think an adjustment is about to take place soon....REALITY will hit before the effect of QE and low IR 's dwindle

REMEMBER:

Yet a Rightmove survey at the end of August gave the "encouraging" signal that 78% of respondents reckoned UK house prices won't fall any further this year. And also that "the UK property industry is now seeing a virtuous circle of confidence building upon confidence".

Why's this another worry? Well, as Fidelity's Anthony Bolton explained in the weekend's FT about the stock market, "if everyone is positioned for the market to rise, it means these bullish expectations are already discounted" – i.e. factored into the price. As a result, "the market often moves to make the majority wrong and does the unexpected… so at turning points especially, the correct is the minority view".

And while there are plenty of differences between shares and houses, the principles of crowd behaviour are the same for every asset class. When almost everyone is bullish, get ready for a price fall. The near-8.5% bounce in property prices within the last six months (using Nationwide's figures at least) now looks ripe for a reversal.

[Bloo Loo]

QE affects the market alright....it stabilises banks balance sheets....and even with QE, they have a long way to fall yet.

QE is NOT coming into the wild in quantity. it remains on deposit in the hands of the banks.

[tpbeta]

QE affects the market alright....it stabilises banks balance sheets.

I don't think this is quite right - bank debts are unaltered by QE per se, it just gives then sufficient liquidity to continue operating despite having balance sheets that show them to be technically bankrupt if their assets are valued accurately. To actually effect their balance sheets they'd have to be given the money as a capital injection, or else they'd have to invest the QE (for example in the stock market) and keep the profits (which is pretty much what some of them have done).

[crouch]

To answer this you only have to ask why the BOE decided to extend QE - and the Governor was in favour of an even greater extension than that decided. The only reason was that it was thought that the situation would relapse if QE was withdrawn. The UK as we all know is in a very bad position and either a reduction in QE or a rise in IR will cause difficulty at the moment. But more QE risks putting government debt into the stratosphere and higher IR will choke off any prospect of recovery; and I say "prospect" because I simply don't believe all the talk of green shoots.

[moneyfornothing]

I don't think this is quite right - bank debts are unaltered by QE per se, it just gives then sufficient liquidity to continue operating despite having balance sheets that show them to be technically bankrupt if their assets are valued accurately. To actually effect their balance sheets they'd have to be given the money as a capital injection, or else they'd have to invest the QE (for example in the stock market) and keep the profits (which is pretty much what some of them have done).

Exactly, no one has had free money from QE .. that would only be the BOE and they havent handed it out for free .. yet !!

There has been no 'helicopter drop' of money .. if banks have got QE money it has been because they sold treauries worth the same amount -- they have profited on the arbitrage opportunity between the BoE & the Treasury .. though substantial that is a fraction of the QE money created .. have I got this right ?

[cashinmattress]

If the banks weren't leveraged at 40-50 to 1, we'd not be in this situation.

Every few % drop in the markets wipes out their positions.

The BOE is simply recapitalizing these gamblers, with your money.

It will only get worse from here on, unless of course people start to wake up and learn to trade by themselves.

[Bloo Loo]

I don't think this is quite right - bank debts are unaltered by QE per se, it just gives then sufficient liquidity to continue operating despite having balance sheets that show them to be technically bankrupt if their assets are valued accurately. To actually effect their balance sheets they'd have to be given the money as a capital injection, or else they'd have to invest the QE (for example in the stock market) and keep the profits (which is pretty much what some of them have done).

sure, the banks debts are unaltered, but QE money loses no value in numbers terms, whereas the losses on the financial "assets" are growing by the day ( not that they admit to the true value anyway), but they need the QE reserves for the day of reckoning....which could come anytime.

[Bloo Loo]

Exactly, no one has had free money from QE .. that would only be the BOE and they havent handed it out for free .. yet !!

There has been no 'helicopter drop' of money .. if banks have got QE money it has been because they sold treauries worth the same amount -- they have profited on the arbitrage opportunity between the BoE & the Treasury .. though substantial that is a fraction of the QE money created .. have I got this right ?

not forgetting that banks are borrowing from the BoE (with a haircut) against impaired assets. these loans need to be rolled over...if their balance sheet get too bad, then the BoE would have a hard case to convince to renew.

QE on the balance sheet gives them some solid foundation on which to work. the other impaired assets, cant be sold except to the BoE, so are virtually worthless.

Hence, QE is not coming into the wild causing inflation.

Edited September 13, 2009 by Bloo Loo

[Sybil13]

QE money was pumped money into the economy to encourage banks to lend.

As the economy recovers, banks will start lending just as they always did. No lending = no profits.

Interest rates will climb but slowly. At the same time the current wide spreads will narrow to more traditional levels.

It may be a bumpy ride for a while in 2010. But recovery will happen and life will go on.

House prices will neither fall or rise significantly.

Just a thought, if house prices haven't fallen according to Rightmove's ASKING prices and most news articles , then on what basis are we being told that so many are in negative equity ? I know that those that borrowed 125% LTV were in negative equity from the start, but surely we are being told that so many are in negative equity because in truth the lender that gave them that mortgage would no longer value that property above 20 - 30% down from peak or indeed up to 40% for remortgages, isn't that why about 50% of sales are to cash buyers, and why Rightmove said that EA's would advise a seller to take a lower offer from someone who doesn't need a mortgage ? Of course they could wait for a cash buyer willing to make a higher offer.

I know that doesn't make sense, if you were a cash buyer why would you throw away your money on a property that nobody else can afford on a mortgage therefore it HAS to fall about 40% or more ...but the point is we are at the tail end of a bull trap and many cash rich buyers believe they are in the lucky position of being able to buy a property BEFORE they SHOOT up again, even though they haven't really shot down yet. We have had posters on HPC this week, bearish at heart, saying they have jumped in with a 6% discount because they are tired of waiting. Merryn Somerset Webb said they would:

Stay Away From Property it Has Much Further to Fall

The truth is that all real bear markets tend to offer the unwary investor one last opportunity to lose money. The summer of 2009 is probably that opportunity this time round.

There may well be a quite a big pick up in inquiries, transactions and even prices over the next few months. This will be partly down to the fact that, for those who have cash and want to buy at some point, the housing bear market is getting boring – and partly because a lot of property looks cheap relative to its peak price.

But the basic market conditions are still all wrong for recovery

The point is we wouldn't have how many (?) in negative equity if property in truth has not fallen 25% + from peak if the current historically low market (transactions / approvals) , was reliant on buyers needing a mortgage at a sensible lending ratios (loan to income ) and sensible valuations.

For property transactions to pick up property values HAVE to fall given that there is not going to be return to anything like 2007 lending levels for a very long time to come.

[Vaevictus]

I think there will be an event that will force the governments/BOE's hand.

IR rise will be the catalyst for the next big leg down, and it will be forced upon us. IMF? Run on sterling?