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Ash4781

Trying To Stimulate Demand

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Approvals are back down in the 4xk region. Someone posted a thread on falling fixed rates and someone else on mortgage rates going below inflation. Demand appears to very weak and falling! Some are using the low rates on favourable mortgage terms to pay down the capital.

It's one heck of a mess.

Is it that in trying to stimulate demand in the current environment this just causes prices to rise and wipe out the original stimulus (bearing down on demand ) ?

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Some are using the low rates on favourable mortgage terms to pay down the capital.

Many years ago, I heard someone put the case that mortgage prepayment was about as reliable an indicator as it gets* that real rates will continue to winch their way below current levels for some considerable time to come.

If we start with the assumption that nominal rates are more likely to rise than either fall or stay the same, let's all take our best guess at what this means for "growth outlook" (or if you prefer, the aggregate willingness of reserve banks to reduce either liquidity or velocity in any way shape or form).

(* although the way they put it, it was more a case of "Think of the midpoint in the curve being average Joe with an average house and an average job - now understand that half the population are more likely than this to make a more extreme version of the same wrong call at the wrong time. Now where's the bias in the sample you're showing me? Whatever you do next, don't do that, not even a little.")

Edited by ParticleMan

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Once again I feel like the div kid in the class who can't join the dots.

Many years ago, I heard someone put the case that mortgage prepayment was about as reliable an indicator as it gets* that real rates will continue to winch their way below current levels for some considerable time to come.

Prepayment = rates falling (presumably because demand for money drops - savings have increased). Right?

If we start with the assumption that nominal rates are more likely to rise than either fall or stay the same, let's all take our best guess at what this means for "growth outlook" (or if you prefer, the aggregate willingness of reserve banks to reduce either liquidity or velocity in any way shape or form).

Nominal rates rise, so that means growth outlook is up? So real rates will fall, while nominal goes up?

(* although the way they put it, it was more a case of "Think of the midpoint in the curve being average Joe with an average house and an average job - now understand that half the population are more likely than this to make a more extreme version of the same wrong call at the wrong time. Now where's the bias in the sample you're showing me? Whatever you do next, don't do that, not even a little.")

I'm lost here. Don't do what the majority do, because they're wrong - ie real rates are going to fall after Joe 6Pack has tried to pay down the mortgage?

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Approvals are back down in the 4xk region. Someone posted a thread on falling fixed rates and someone else on mortgage rates going below inflation. Demand appears to very weak and falling! Some are using the low rates on favourable mortgage terms to pay down the capital.

It's one heck of a mess.

Is it that in trying to stimulate demand in the current environment this just causes prices to rise and wipe out the original stimulus (bearing down on demand ) ?

If they wanted to stimulate demand one imagines they might choose to relax lending criteria.

Bankers being morons, they have of course tightened lending standards at precisely the wrong time in the cycle thus choosing to destroy the value of their own assets.

I suppose we'll find out one day who has the deepest pockets and ends up with all the mortgages.

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Prepayment = rates falling (presumably because demand for money drops - savings have increased). Right?

Prepayment == reloading the institution who lent you the money in the first place ahead of schedule (they wind up with their balance sheet shrunk at the wrong time - consider the impact of writing new loans when real rates are high, verses when they are - as they are at present - low).

Nothing to do with "saving" (Volker choked that chicken to death).

Everything to do with Injin-dollars getting vapourised leaving the lender able, and very, very willing to create more.

Nominal rates rise, so that means growth outlook is up?

Nominal rates are set by the market's appetite for tomorrow's jam today.

Nominal rates rise if the market percieves that it'll always be jam tomorrow, and never jam today (if the appetite for risk diminishes).

Real rates can rise one of two ways - cutting the risk-free rate, or, tempering core prices (asset prices and income from labour) (the converse is true).

Currently, it seems more probable that market rates (nominal rates) will rise.

It also seems more probable* that real rates will fall.

The next question (and obvious) is how...

So real rates will fall, while nominal goes up?

The only link between the two is reserve policy...

(* if we assume that our neighbours are in fact retiring existing borrowing at a rate of knots)

Edited by ParticleMan

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If they wanted to stimulate demand one imagines they might choose to relax lending criteria.

Bankers being morons, they have of course tightened lending standards at precisely the wrong time in the cycle thus choosing to destroy the value of their own assets.

I suppose we'll find out one day who has the deepest pockets and ends up with all the mortgages.

but to relax lending criteria you need to be confident that the potential profit will be worth the risk being taken. Banks know property is risky at the moment and so can't lend high LTV at lowish rates. They will know that this will make the situation worse by restricting demand but they cant afford to take the risk.

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Prepayment == reloading the institution who lent you the money in the first place ahead of schedule (they wind up with their balance sheet shrunk at the wrong time - consider the impact of writing new loans when real rates are high, verses when they are - as they are at present - low).

Nothing to do with "saving" (Volker choked that chicken to death).

Everything to do with Injin-dollars getting vapourised leaving the lender able, and very, very willing to create more.

Why aren't banks lending more? I thought they _wanted_ their balance sheets shrunk?

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Why aren't banks lending more? I thought they _wanted_ their balance sheets shrunk?

They've been very very willing for as long as real rates have been at inter-generational lows.

Able, on the other hand...

... that requires a few panicky cretins to hand some Injin-dollars back.

(no bank wants its balance sheet shrunk - every bank is a glorified spreadsheet, a hoover specifically designed to suck up yield)

Edited by ParticleMan

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  • 150 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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