The Mechanics Of Meltdown

[Second Time Around]

Like many others on the site I have been waiting for the predicted course of events to resume once the effects of QE have worn off.

Interest rate rises are artificially low, but pressure to raise rates is increasing both internally and externally.

So if they happen what impact will rising rates have on the housing market? I suggest the following:

1) Buyers will be unable to to afford borrow as much money as rates rise

2) Mortgage holders on variable rates will have less disposable income - reducing their scope to save as a means of trading up

3) The impact of a) and b)should lead to a fall in house prices.

4) A fall in house prices will reduce mortgage holders' equity - it will reduce their scope to trade up thus markedly affecting sales higher up the chain

5) There will be an increasing number of mortgage holders with negative equity - restricting their ability to sell up and/or trade up unless they can save the money to clear it (made difficult by 2) above)

6) There will be an increase in the number of repossessions and forced sales - driving marginal prices down.

7) It will force prices down at the top end of the market (excluding the parts of the property market affected by international investors/buyers).

8) The longer prices fall the potential interest to investors will drop and buyers will be cautious about buying until they can feel confident that the bottom has been reached.

What I would appreciate is some views on:

- What events/ government actions might limit the impact of rising interest rates

- Over what sort of timescale will this play out

- How much influence have cash buyers and the bank of mum and dad got left

[Mega]

They will carry on printing till the deflation turns (very soon) then they will want inflation. The problem they have is they might be able to BLAG the "Sheep" but not the markets. Having been taken for a ride the bond markets will decied that it "Pay back time" (in every sense of the word). The MARKET will DEMAND a REAL return & don't forget the WORLD will be seeking ANY cash & will offer REAL returns.

Ken Clake is warning on this, as in Frank field.

Mike

[Executive Sadman]

- What events/ government actions might limit the impact of rising interest rates

I honestly cant see a way foward.

Why would govts. just decide to let house prices go where they need to after doing so much to stop it. Yes its hurting the productive part of the economy, but govts usual response is if it isnt working, do more of it, dont stop doing it.

OTOH, i think looking at food and fuel prices, and as others have noted, the demand destruction effect they have, they may have already overcooked inflation, and imo, politically will very soon have little chance for more QE.

I guess we'll just have subdued housing activity of under 50%, no real change.

[catmandu]

What I would appreciate is some views on:

- What events/ government actions might limit the impact of rising interest rates

- Over what sort of timescale will this play out

- How much influence have cash buyers and the bank of mum and dad got left

I think most on this site would agree with your main points. It's more common sense than guesswork.

To answer your questions, cash buyers and BoMD can only ever have a limited impact on the market. If the market is going up over a period of time, you need to look further for answers than those 2 factors. What limited impact they do have though could continue for some time. I've always felt that the government always try to keep the housing market buoyant and they (or the BoE) won't increase IRs for some time yet, but I 'd also bet that they'll start rising before the BoE and Govt would like as other factors will eventually become more important than propping up the housing market. Because they really don't want to put up IRs, when they do get forced up, it's likely to result in quick, steep rises, e.g. 1% over 6-8months. Regarding timescale, I've never been brave enough to guess that. If I did want to guess, I'd go with the general opinion of it all starting later in the year with the full result to be felt some time after that.

[Mal Volio]

Depends whether you believe that the effect of QE is going to be to force inflation. So far, it doesn't seem to have brought about the dire consequences of a hyperinflatonary holocaust that some on here predicted.

Turning it off may just leave us in a kind of boring metastable state that could last years. If nothing rocks the boat then inflation may sit at a few % for many years, growth may be minimal and there'd be no driver to increase IRs.

OTOH if the £ tanks for whatever reason IRs may be raised. Or not.

I certainly don't think that a catastrophic (for the indebted) rise in IRs is a given in the next few years - unfortunately. From a selfish POV I'd benefit enormously.

[Once in a lifetime]

Like many others on the site I have been waiting for the predicted course of events to resume once the effects of QE have worn off.

Interest rate rises are artificially low, but pressure to raise rates is increasing both internally and externally.

So if they happen what impact will rising rates have on the housing market? I suggest the following:

1) Buyers will be unable to to afford borrow as much money as rates rise

2) Mortgage holders on variable rates will have less disposable income - reducing their scope to save as a means of trading up

3) The impact of a) and b)should lead to a fall in house prices.

4) A fall in house prices will reduce mortgage holders' equity - it will reduce their scope to trade up thus markedly affecting sales higher up the chain

5) There will be an increasing number of mortgage holders with negative equity - restricting their ability to sell up and/or trade up unless they can save the money to clear it (made difficult by 2) above)

6) There will be an increase in the number of repossessions and forced sales - driving marginal prices down.

7) It will force prices down at the top end of the market (excluding the parts of the property market affected by international investors/buyers).

8) The longer prices fall the potential interest to investors will drop and buyers will be cautious about buying until they can feel confident that the bottom has been reached.

What I would appreciate is some views on:

- What events/ government actions might limit the impact of rising interest rates

- Over what sort of timescale will this play out

- How much influence have cash buyers and the bank of mum and dad got left

9) Drives businesses to the wall causing the recession to deepen unemployment to increase.

the climate will dictate interest rates to lower... again!

[Dopamine]

9) Drives businesses to the wall causing the recession to deepen unemployment to increase.

the climate will dictate interest rates to lower... again!

Indeed, neutral rate is probably lower now than it was 3 years ago - in the range 2.5-3.5% as opposed to 4.5-5.5%

[SurgeonGeneral]

Depends whether you believe that the effect of QE is going to be to force inflation. So far, it doesn't seem to have brought about the dire consequences of a hyperinflatonary holocaust that some on here predicted.

Turning it off may just leave us in a kind of boring metastable state that could last years. If nothing rocks the boat then inflation may sit at a few % for many years, growth may be minimal and there'd be no driver to increase IRs.

OTOH if the £ tanks for whatever reason IRs may be raised. Or not.

I certainly don't think that a catastrophic (for the indebted) rise in IRs is a given in the next few years - unfortunately. From a selfish POV I'd benefit enormously.

Core inflation is rising in the UK, and only the UK vs USA/Euro.

Our IRs are going up, deffo.

Nick

[Pent Up]

Did anyone read the minutes of the MPC meeting? Serveral members expressed concern that inflation could get out of control. We might see rates going up sooner than people think.

Saying that we don't need higher rates for a crash, look at what happened in Japan.

[tim123]

Depends whether you believe that the effect of QE is going to be to force inflation. So far, it doesn't seem to have brought about the dire consequences of a hyperinflatonary holocaust that some on here predicted.

Inflation is a lagging indicator.

What you do in the economy today affects inflation in 12-18 months time, not in 1 or 2.

And the risk isn't hyper inflation, bog standard inflation is bad enough.

12% YoY for 6 years halves my savings. I can't afford to have that happen.

tim

[winkie]

This country can't afford high inflation...the government can't, the savers can't, the borrowers can't.........what we need is real growth from a productive society that produces things at the right price that the world wants and needs.

[Once in a lifetime]

Makes you wonder why they're at 0.5%... don't it ?

[Mal Volio]

12% YoY for 6 years halves my savings. I can't afford to have that happen.

You might not want 8% inflation (or whatever) but it's what the Govt feels it wants to act on that matters. High single-digit inflation (and even double-digit inflation) was the norm for a long, long time.

If it's not running away then they'll leave it be.

[Mal Volio]

Core inflation is rising in the UK

But not to especially high levels. Yet.

Our IRs are going up, deffo.

well, I'd love to hope so to - but I'm not as certain as you are.

[SurgeonGeneral]

But not to especially high levels. Yet.

well, I'd love to hope so to - but I'm not as certain as you are.

With the UK government buying 100% of Gilts (via BoE), it is a given there were no market takers at the rate offered.

While I know this is the purpose of QE, adjustment upwards seems inevitable.If CPI is what 3% and rising would you lend these clowns any money at less than 6.5 or 7%?

Sh*t I wouldn't.

Nick

[Authoritarian]

People get quite confused over the interest rate question so tend to blame 'artifically low interest rates for stoking the bubble' when in fact this isn't the case.

Cheap money of itself isn't a problem, we all like cheaper things and money is no exception. Low interest rates under the right circumstances can actually lower inflation, expensive money is a barrier to competition as it allows inefficient companies to continue trading with a reduced threat in the marketplace. Cheap money remedies this.

But the housing markets acts as a hoover sucking up all the newly available spending power in the form of higher prices, it does this whenever we experience a reduction in costs because its an asset that is limited in supply and absolutely crucial to the business of living and working.

Higher interest rates will lower nominal prices, but if you're just paying essentally the same price with more to the bank then housing in aggregate become no more affordable.

[tomwatkins]

People get quite confused over the interest rate question so tend to blame 'artifically low interest rates for stoking the bubble' when in fact this isn't the case.

Cheap money of itself isn't a problem, we all like cheaper things and money is no exception. Low interest rates under the right circumstances can actually lower inflation, expensive money is a barrier to competition as it allows inefficient companies to continue trading with a reduced threat in the marketplace. Cheap money remedies this.

But the housing markets acts as a hoover sucking up all the newly available spending power in the form of higher prices, it does this whenever we experience a reduction in costs because its an asset that is limited in supply and absolutely crucial to the business of living and working.

Higher interest rates will lower nominal prices, but if you're just paying essentally the same price with more to the bank then housing in aggregate become no more affordable.

Well that's a novel way of looking at it. Cheap money not a problem??? Expensive money allows inefficient companies to continue trading? Is this a windup?

[tomwatkins]

People get quite confused over the interest rate question so tend to blame 'artifically low interest rates for stoking the bubble' when in fact this isn't the case.

Cheap money of itself isn't a problem, we all like cheaper things and money is no exception. Low interest rates under the right circumstances can actually lower inflation, expensive money is a barrier to competition as it allows inefficient companies to continue trading with a reduced threat in the marketplace. Cheap money remedies this.

But the housing markets acts as a hoover sucking up all the newly available spending power in the form of higher prices, it does this whenever we experience a reduction in costs because its an asset that is limited in supply and absolutely crucial to the business of living and working.

Higher interest rates will lower nominal prices, but if you're just paying essentally the same price with more to the bank then housing in aggregate become no more affordable.

Cheap money ALWAYS leads to asset bubbles. Always.

[Authoritarian]

Well that's a novel way of looking at it. Cheap money not a problem??? Expensive money allows inefficient companies to continue trading? Is this a windup?

Righto, so expensive loans are conducive to a competitve environment are they? Don't you think expensive money might make starting up a business more of a risk?

Maybe you're the sort of bloke that likes paying high prices for the things that you purchase.

[Authoritarian]

Cheap money ALWAYS leads to asset bubbles. Always.

Cheap money gives people more spending power which then allows them to bid up the price of housing/land. Because land is in fixed supply there can be no increase in its production which act as a brake on prices under normal market conditions. Its not the money which is at fault.

Try replacing the word money with anything else you purchase and you'll see how foolish your position is.

Edited March 21, 2010 by chefdave

[winkie]

People get quite confused over the interest rate question so tend to blame 'artifically low interest rates for stoking the bubble' when in fact this isn't the case.

Cheap money of itself isn't a problem, we all like cheaper things and money is no exception. Low interest rates under the right circumstances can actually lower inflation, expensive money is a barrier to competition as it allows inefficient companies to continue trading with a reduced threat in the marketplace. Cheap money remedies this.

But the housing markets acts as a hoover sucking up all the newly available spending power in the form of higher prices, it does this whenever we experience a reduction in costs because its an asset that is limited in supply and absolutely crucial to the business of living and working.

Higher interest rates will lower nominal prices, but if you're just paying essentally the same price with more to the bank then housing in aggregate become no more affordable.

People with cash will look around for places to store their money rather than keeping it in a money losing bank account paying 1.5% or less when quite honestly most things we NEED to buy are running at inflation increases far higher than that....so what do they do? They look to put in in a 'store of value' spend it on, invest it in, or transfer it to, something that will preserve its value...it is quite obvious the banks don't want savings, they seem to have been getting all they require from QE and tax payers....not only that mortgage rates can only go up, the margins are higher than ever before, higher rates will keep house prices down...they have a ginormous a debt to repay.

[Mal Volio]

If CPI is what 3% and rising

If. It's a big if.

Right now, it's all ticking along and whilst i fully understand the burning desire of people here (ncluding me) to see higher rates, i just don't think it's a given that it's going to happen in the short-term. In the medium term, yes IRs will likely return to historical "usual" levels - but I'm not certain that will involve sudden big rises in the effective rates people pay on eg mortgages.

edit: spelling

Edited March 21, 2010 by Mal Volio

[Cicero]

This country can't afford high inflation...the government can't, the savers can't, the borrowers can't.........what we need is real growth from a productive society that produces things at the right price that the world wants and needs.

Good commonsense post as usual Winkie.

Sadly, our politicos, business leaders and entrepreneurs ain't listening. The UK is a nation without a plan. Unlike the Japs, Koreans and most spectacularly the Chinese.

[Authoritarian]

Did anyone read the minutes of the MPC meeting? Serveral members expressed concern that inflation could get out of control. We might see rates going up sooner than people think.

Saying that we don't need higher rates for a crash, look at what happened in Japan.

Expensive money is also inflationary. Think about it.

[Parkwell]

Ultimately it doesn't matter whether the money is cheap or expensive. It is what you do with it that matters. Risk assessment went out the window a long time ago, as banks have taken increasingly shorter term positions. Put simply, the problem is (as with so many things) stupid and thoughtless people on both sides of the equation. Many of which are in positions of power.