Low Rates Aren't Working After All .....

[LuckyOne]

Apologies if this has already been posted ....

One of the bulls' favourite mantras is that low interest rates are going to save the housing market. The implication is that investors should always align themselves with their central banks.

This article seems to indicate that household financial conditions are deteriorating even in this extreme interest rate environment. Heaven help them when rates actually start to rise ....

http://www.telegraph.co.uk/finance/economics/8197806/Low-interest-rates-failing-to-rescue-British-households-from-1.45-trillion-debts-says-Bank-of-England.html

The study, conducted by NMG Financial Services Consulting, shows that almost half of all households are concerned about their debt – largely because soaring credit card rates are eroding savings from lower mortgage costs.

The research contradicts comments made by Lord Young, the Tory peer who resigned as an adviser to David Cameron after saying "the vast majority of people in the country today have never had it so good" since the Bank slashed rates to 0.5pc.

Despite record low interest rates, half of respondents reported a fall in monthly disposable income after tax, mortgage, rent, bills and other loan payments. Nearly a third, 29pc, said their debt concerns had risen over the past two years, compared with just 12pc who are now less worried.

The survey paints a deeply troubling picture of a nation still struggling to pay off its debts despite the historically low rate environment. UK consumer borrowings are around £1.45 trillion and have not begun to shrink. The Bank has already warned that more than one in two people with "unsecured" debts, such as credit cards or personal loans, are struggling to cope.

Rates on credit cards have risen from 17.8pc in November 2007 to 18.7pc, according to the Bank, despite a cut in base rates from 5.75pc to 0.5pc. In addition, NMG notes that 48pc of all households are on fixed-rate mortgages, "paying about £680 a month in comparison with about £530 a month for those on trackers or variable rates" for equivalent sized mortgages.

Households with high loan-to-value (LTV) mortgages or renting are struggling the most, the survey says, with the proportion resorting to credit card debt rising: "The fraction of high LTV mortgagors with unsecured debt had risen between the 2009 and 2010 surveys, from 68pc to 92pc."

"Looking ahead, if the increase in debt burden and repayment problems is a leading indicator of households' financial difficulties, the proportion of households falling behind on payments may pick up from current levels."

Despite the high debt burden, households have not used low rates to pay off mortgages. "The share of income devoted to servicing secured debt tends to fall as interest rates fall. However, in 2010 the proportion of households devoting more than 20pc of income to mortgage repayments had fallen only slightly since 2008," the survey finds.

More households have fallen behind on "bills and credit commitments" than last year, and the proportion struggling to keep up has risen from 34pc to 40pc – particularly for those with credit card debt or personal loans.

Borrowers who said their credit card debts or personal loans have become a burden increased to 51pc – the highest level in the 15 years the research has been running. The Bank notes: "The burden of unsecured debt has risen this year, most likely reflecting a combination of weak earnings growth and the interest rates on unsecured debt remaining high despite falls in Bank rate."

Some 45pc of households are now concerned about their overall debt levels, with 11pc "very concerned". For renters and high LTV mortgage households, the majority are worried, while low LTV and outright owners are comfortable with their situation.

NMG carried out the survey in late September 2010 on about 2,000 British households on behalf of the Bank.

[non frog]

... Heaven help them when rates actually start to rise ....

It is received wisdom that rates will not rise. Most people seem to think this is the case. As the article makes clear credit card rates are now bananas. The reason for that is the default rate. Some £100Bn has been written off by the CC companies. As people increasingly default or fall into arrears with their mortgages so the lenders must surely try to recover this loss from their paying clients with a rate rise? This too must surely be exacerbated by the numbers on trackers which are loss making to the lenders?

Perhaps the rates to new borrowers explains the unwillingness to borrow which the press misrepresent as an unwillingness to lend?

[TheCountOfNowhere]

No S*** sherlock.

I've been saying this to people for a while now....rates have gone down to 0....cost of living has shot up to fill the gap/much up the new extra disposable income....the cost of living is getting unbearable for most. It wil be carnage when rates have to go up...and they will.

Sit back and watch...

[long time lurking]

No S*** sherlock.

I've been saying this to people for a while now....rates have gone down to 0....cost of living has shot up to fill the gap/much up the new extra disposable income....the cost of living is getting unbearable for most. It wil be carnage when rates have to go up...and they will.

Sit back and watch...

B.O.E admitting failed policies ? or preparing the ground? I`d like to thing the latter as they have never done the former before,are the chicken`s finally coming home to roost

[nohpc]

This is exactly why interest rates are going to have to stay low for ages. The UK cannot handle a higher BOE rate than 0.5%. Loan rates are already sky high as it is and any base rate increases will push them up even higher.

Good news for those with life long tracker mortgages. I don't see rates above 1% for at least 3 years but possibly even japanese style 10 - 20 years.

[kilroy]

http://www.dailymail.co.uk/news/article-1338094/Credit-card-debt-crisis-quarter-families-struggle-make-payments.html

something similar in the wail,froma BoE report

'More than a quarter of households are struggling to pay their credit card bills as banks continue to wring as much as they can from hard-pressed families, a report from the Bank of England reveals today.

The survey of 2,000 households lays bare how high street lenders are extracting a high price from their credit card customers, many of whom cannot obtain cheaper forms of credit. Although the base rate has been at a record low of 0.5 per cent for nearly two years, the average interest charged on credit card debt is more than 33 times higher at a whopping 16.68 per cent.

Half of households in Britain are less well-off than they were a year ago – and they fear they will become poorer still because of rising taxes and stagnant wage growth.

One in two families has seen their ‘available income’ fall over the past 12 months, the survey revealed.

Low rates jsut kick the can down the road.the day of reckoning is coming.

This very much reminds me of the Kyle Bass-Japan will go pop first- theory,bascially stating that ZIRP allowed them to laod up with so much debt that small 25 bp rises can be proportionately more brutal than larger changes at earlier phases of the IR cycle.

Clearly implies that they are paying the market rate for their credit risk.....

[R K]

Similar problem to that faced by Greece and Ireland.

Most of this debt will need to be 'restructured' one way or another.

It would be better if it were to be defaulted/written down/forgiven sooner rather than later but the banks will string it out as long as possible and the debtors probably think it'll be ok in the end, which in many cases it won't.

Merv ought to look at ways to buy up this debt off banksters books and quease it directly.

[sympatex]

Clearly implies that they are paying the market rate for their credit risk.....

The silly thing is the headline is implying that even though 'rates' are near 0 people are still struggling to pay of ftheir credit cards..... which it then states is at 16% avg. Well if all the debts were charged at 0.5% i doubt they would be struggling and if they were, why would they care about C/C debt, (this seems to be the prevailing attittude).

Pointless article, real world rates are nothing like 0.5 a few lucky mortgage holders might have a 1% ish rate on their mortgage, the cheapest money they will ever have the luxury of borrowing. They would be sensible to not pay their mortgages and store the overpayments somewhere else until mortgage rates rise beyond savings rates - tax.

The speed and level at which they raise them will be the only concern for those on variable rate borrowing.

[xux42]

Loan rates are already sky high as it is and any base rate increases will push them up even higher.

Why?

The wholesale money market determines the mortgage rates banks can offer AFAIK so why would the banks pass on a base rate rise to borrowers if wholesale costs had not moved.

Even if the wholesale cost does rise, passing it on in full to existing borrowers whose mortgages are based on money borrowed at record low wholesale rates would be criminal.

I don't know what the banks will do. They seem capable of anything including self destruction.

But I will predict is that new borrowing, already limited, will almost disappear for a while.

Oh yeah, heard of 2 more chains collapsing this weekend due to Mortgage valuations.

[Toto deVeer]

What is really frightening is that interest rates are at 300 year lows and still house prices are falling...

Something is very seriously wrong.

[Timak]

I think people have actually geared themselves according to a world where IRs stay low for ever. They have actually factored in the reduced mortgage and payments and re-borrowed / spent more accordingly.

This is a very VERY dangerous position, and it will be carnage eventually!

I was paying £720 a month in rent in 2001, I now pay £240 a month on a repayment mortgage for my house (thanks to low interest rates and offsetting savings)

If low rates continue (3.65% is my current deal) for the next 20 years I can afford to borrow the additional £150,000 I would need to get to buy the type of house I'd like. This would take my payments to £1200 a month, an amount within my comfort zone, just.

If rates went up to say 7-8% I'd be screwed, by which I mean I'd be a slave to the mortgage which is what I couldn't stand to be.

So I either hold tight and wait for prices to come down (which I believe they will but not as fast as I'd hope) or I take the plunge and risk being one of the suckers caught out.

[TheCountOfNowhere]

This is exactly why interest rates are going to have to stay low for ages. The UK cannot handle a higher BOE rate than 0.5%. Loan rates are already sky high as it is and any base rate increases will push them up even higher.

Good news for those with life long tracker mortgages. I don't see rates above 1% for at least 3 years but possibly even japanese style 10 - 20 years.

This is exactly why some people would like rates to stay low...but since when did the powers that be give a toss about joe blogg getting tossed out his home etc etc etc.

When the time suits, or when the need arises, there will be carnage.

[fluffy666]

What is really frightening is that interest rates are at 300 year lows and still house prices are falling...

Something is very seriously wrong.

It's as if we had some kind of gigantic economy-destroying super bubble, or something.

[miko]

...but since when did the powers that be give a toss about joe blogg getting tossed out his home etc etc etc.

Since the powers that be realized with higher rates joe blogg and co will get tossed out of their homes and default on mass thus bringing down the whole financial system.

[winkie]

High debt and high housing costs take away spending power irrespective of what the interest rate is...it is not sufficient to only cover only the interest the capital has to be repaid at some point...you can string it along or even default or inflate...someone will in the end pay for it one way or another, more often than not the innocent parties get the debt transferred to them and the guilty only end up paying a small proportion even when they are 100% to blame.

[Lepista]

It's the lack of mew. In 2007/8, MEW accounted for 9% of the GDP, if I remember correctly.

If you're a 40% taxpayer, that's quite an additional income.

That income stream has now stopped, and people are having to face up and pay their mortgages.

That's got to hurt, even with low interest rates.

[juvenal]

I was paying £720 a month in rent in 2001, I now pay £240 a month on a repayment mortgage for my house (thanks to low interest rates and offsetting savings)

If low rates continue (3.65% is my current deal) for the next 20 years

See line in bold.

Do you seriously think that's likely?

Edited December 13, 2010 by juvenal

[Timak]

See line in bold.

Do you seriously think that's likely?

Honestly I don't know.

15 years of ZIRP in Japan so far....

[long time lurking]

The question I'm asking myself is why are the B.O.E publishing this report as it seems to me it`s saying there action`s have failed ? why would they do that ,as they commissioned it {payed for it} so they must have control over the publication of it ?Have they all of a sudden developed a conscience? or are they preparing the ground for a I.R rise as its `doing no good` to keep them as they are .

And I wonder what it may do for all the banks that are loosing money on there B.O.E tracker`s which are only getting more costly to refinance I can only live in hope

[Blod]

It's the lack of mew. In 2007/8, MEW accounted for 9% of the GDP, if I remember correctly.

If you're a 40% taxpayer, that's quite an additional income.

That income stream has now stopped, and people are having to face up and pay their mortgages.

That's got to hurt, even with low interest rates.

The lack of MEW just isn't ever mentioned but as you point out it had a huge effect. There are still people out there who think that as long as they can bide their time MEW will return to save them. However the longer the banks continue to regulate the retail money supply the more likely we are to see HPC as the the BoE rate will only have a psychological effect as has already been pointed out.

[Democorruptcy]

The question I'm asking myself is why are the B.O.E publishing this report as it seems to me it`s saying there action`s have failed ? why would they do that ,as they commissioned it {payed for it} so they must have control over the publication of it ?Have they all of a sudden developed a conscience? or are they preparing the ground for a I.R rise as its `doing no good` to keep them as they are .

And I wonder what it may do for all the banks that are loosing money on there B.O.E tracker`s which are only getting more costly to refinance I can only live in hope

They are blaming high credit charges for the problems ahead. By saying:

"We developed a way that savers could be robbed to help the indebted but the nasty middlemen have pocketed the loot themselves. It's not our fault guv"

[long time lurking]

Honestly I don't know.

15 years of ZIRP in Japan so far....

Japan has always had a trade surplus {they have funded themselves from within}

U.K run`s a trade deficit and will rely on foreign lenders to a greater extent so that would say to me we are not going to be able to go down the Japanese road

[nohpc]

Why?

The wholesale money market determines the mortgage rates banks can offer AFAIK so why would the banks pass on a base rate rise to borrowers if wholesale costs had not moved.

Even if the wholesale cost does rise, passing it on in full to existing borrowers whose mortgages are based on money borrowed at record low wholesale rates would be criminal.

I don't know what the banks will do. They seem capable of anything including self destruction.

But I will predict is that new borrowing, already limited, will almost disappear for a while.

Oh yeah, heard of 2 more chains collapsing this weekend due to Mortgage valuations.

tha banks will increase their rates even if wholesale rates don't rise because they want to skim as much profit as possible

This is exactly why some people would like rates to stay low...but since when did the powers that be give a toss about joe blogg getting tossed out his home etc etc etc.

When the time suits, or when the need arises, there will be carnage.

the powers that be have taken multple unprecedented steps to keep joe bloggs in their home so far to date haven't they?

[Si1]

the powers that be have taken multple unprecedented steps to keep joe bloggs in their home so far to date haven't they?

no. they only did so right up to the date of the general election

[long time lurking]

They are blaming high credit charges for the problems ahead. By saying:

"We developed a way that savers could be robbed to help the indebted but the nasty middlemen have pocketed the loot themselves. It's not our fault guv"

That's roughly the way I read it but the bit that sticks in my throat is they are saying there actions failed ,all be it with a {finger pointing at the banks for the failure} .I'm sure they could of blamed the banks with out discrediting them self ,it`s not very often you hear theB.O.E saying we fecked up