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Ephraim Bubble Blower

Interest Rates Misunderstood

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There is a misguided view amongst vested interests that because interest rates in the UK seem to have peaked and are now falling that this will save the housing market. Infact the opposite is the case, and the US is a good case in point.

As rates are rising (as they are in the US) and the central bank/Fed is signalling clearly this to continue for the timebeing, there is a big incentive to buy now as opposed to waiting because mortgages will even more expensive next month. This dynamic whilst a little paradoxical exists because expectations for future house price growth remain high eg. 10%+ p.a. judging from recent surveys.

Once the authorities signal that rates have peaked (or even begin to fall), and once expectations about future house price growth fall from 10%+ towards zero, then essentially there is no incentive a) to buy now (as rates are falling so it's better to wait), or B) even to buy at all, since there is essentially no interest rate which would justify buying, even a zero rate. This is the Japanese lesson.

In my view, the turn in the rate cycle has infact signalled the peak of the housing market rather than a return to growth, and moreover the inverted yield curve now observed in the UK will lead to a reigning in of credit (banks can no longer just borrow short and lend long-term). Despite a false sense from some homeowners that the authorities are somehow 'on their side', infact they are keen to pop the bubble (via inversion of the yield curve) to avoid the deflationary consequences of allowing it to continue, knowing that with interest rates unable to fall below zero, a decade of Japan-esque depression could await.

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I'm confused.

Surely if rates are coming down that will encourage people to buy because the interest they are paying on the mortage is so small?

If rates went down to 3% or less I know I'd be tempted.

But if they were clearly on a downward path implying your mortgage payments would be getting lower over time (hence better to wait), and second if prices themselves were on a downward path implying you wouldn't need to borrow as much capital anyhow, there would be no incentive to rush in and buy. It's a HPC 'virtuous circle'.

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I'm confused.

Surely if rates are coming down that will encourage people to buy because the interest they are paying on the mortage is so small?

If rates went down to 3% or less I know I'd be tempted.

That is because you are thinking rationally. Bubbles and crashes are about herd mentality.

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I'm confused.

Surely if rates are coming down that will encourage people to buy because the interest they are paying on the mortage is so small?

If rates went down to 3% or less I know I'd be tempted.

Don't be confuesed..

Essentially a £140,000 loan and 3% interest.. is still a big loan that is cheap to maintain.

£30,000 loan at 9% is a small loan made fairly expensive to run..

One way you owe £140,000 the other you owe £30,000 and interest rates are a long term average of 6%..

kept low after .com and the 911 and then the Iraq war..

now kept low to try and stave of crippling debt..

Its not working because the high street is failing.

This will cause inflation and high interest rates..

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Have to say I don't agree with you, DD. If the only rates available were fixed then yes, people would wait for fixed rates to fall. But for anyone on a tracker or even a standard variable rate falls eventually feed their way through to the borrower. Once people get the idea that rates have peaked this is just as likely to increase optimism about the economic outlook and their ability to pay interest on a large mortgage, encouraging them to borrow more. If you're right, why didn't the housing market seize up during the long period before 2003 when rates were falling?

IMO it's all academic. The British consumer has borrowed and spent until he's blue in the face, and there's not much a couple of quarter point cuts are going to do to get him spending again. The VIs are kidding themselves if they think it'll make any difference. The economy will slow down, the MPC will want to cut rates, but inflation will prevent them cutting hard enough. Result - stagnation.

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Have to say I don't agree with you, DD.  If the only rates available were fixed then yes, people would wait for fixed rates to fall.  But for anyone on a tracker or even a standard variable rate falls eventually feed their way through to the borrower.  Once people get the idea that rates have peaked this is just as likely to increase optimism about the economic outlook and their ability to pay interest on a large mortgage, encouraging them to borrow more.  If you're right, why didn't the housing market seize up during the long period before 2003 when rates were falling?

IMO it's all academic.  The British consumer has borrowed and spent until he's blue in the face, and there's not much a couple of quarter point cuts are going to do to get him spending again.  The VIs are kidding themselves if they think it'll make any difference.  The economy will slow down, the MPC will want to cut rates, but inflation will prevent them cutting hard enough.  Result - stagnation.

But the yield curve is inverted - this has historically been a precursor to recession - if sentiment about the economic outlook was positive then the yield curve would be steep, pricing in higher economic growth and inflation.

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Why do the Japanese save so much? Because they are getting bad returns on their money. As saver you have two choices - spend it or save even harder and cut back more and try and beat the devaluation.

Once all those that could be conned into borrwing themselves up to the hilt have done so it is then the savers who become spenders. At this point lowering interst rates can have the opposite overall effect than it did before as the borrower tendency are tapped out and the savers will simply refuse to play the debt game and redouble their efforts to get back to parity - result - further consumer slowdown a la Japan. if you want to get out of a hole, STOP DIGGING.

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I agree. Thanks to the interest rate cut and consequent drop in the pound I'm having to save significantly more just to break even... I'm aiming to move to a cheaper place and spend as little as possible in the next year, then sod off abroad with my stash. That's about 10k I was expecting to spend in the next year that I won't be spending anymore.

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I agree. Thanks to the interest rate cut and consequent drop in the pound I'm having to save significantly more just to break even... I'm aiming to move to a cheaper place and spend as little as possible in the next year, then sod off abroad with my stash. That's about 10k I was expecting to spend in the next year that I won't be spending anymore.

Don't take this the wrong way MarkG, but why are you waiting a year to leave?

It sounds like your final year in the UK is going to be quite a crappy one. Is that worth 10k?

If it's better elsewhere why not leave sooner?

Just a thought...

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Don't take this the wrong way MarkG, but why are you waiting a year to leave?

I'd be gone tomorrow if there wasn't a two year wait for a visa... which I'm now about one year into.

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I am beginning to think that debt is really starting to bite hard.

First, house sales dried up,

then furniture/DIY/High street sales...

now....food sales have slipped badly....

and I understand that the average household is now servicing

debts of 1.5 times their annual income....

There is simply no more money to borrow...

no further mortgaging...

houses up for sale at high prices, not selling....

no further move foreseeable....

It's the end of the road.

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Oh I see. I guessing Australia.

Actually, I think Australia is significantly faster than that: they're very eager for new immigrants and increased their annual quota recently. Pretty sure I'd have moved by now if I'd applied there, and if my girlfriend wasn't Canadian I'd have considered it...

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  • 302 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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