Interest Rates Were Cut To Save House Prices – And Banks

[200p]

HPC ahead of the curve again. Well done.

---

Interest rates were cut to save house prices – and banks

Why are UK interest rates so low? To curb inflation? To help industry? The real reason has been to save the housing market from collapse.

And why would the Bank of England, backed by politicians or all parties, want to save the housing market? Votes from homeowners? Not directly. It is because a slump in prices would leave a large part of the population with negative equity.

...

And luckily, general inflation is out of control at 4 to 5 per cent. So if housing is overvalued by 20 per cent, four or five years of flat property prices will give a real decrease in value of that order without actual prices having to move and thus without values falling below the mortgage amount. As prices are tied to earnings rather than retail prices, it might take a little longer unless wages take off.

"The Edge"

Richard Northedge takes on corporate finance

http://dofonline.co.uk/blogs/the-edge/interest-rates/uk-interest-rates-45645645/

[uptherebels]

That's all fine and dandy.................except for the 'overvalued by 20%' bit.

[Guest_James Toney_*]

it is going to be flatg house prices for years until wages catch up,

done everything they can to keep house prices high, and they have done it,

[scottbeard]

And luckily, general inflation is out of control at 4 to 5 per cent. So if housing is overvalued by 20 per cent, four or five years of flat property prices will give a real decrease in value of that order without actual prices having to move

But without wages increasing 4-5%pa too (which they aren't) the houses won't be any easier to afford, in fact they'll be harder as your shopping costs 20% more.

[OnlyMe]

But without wages increasing 4-5%pa too (which they aren't) the houses won't be any easier to afford, in fact they'll be harder as your shopping costs 20% more.

And the rest by the time they have finished propping up the ponzi scheme to save their own skins and reputations.

Then the realisation will come that they have screwed the economy even more. Still it won;t matter them, Kunt & Co will have slipped off into relative obscurity with their inflation hedged pensions in tact.

[Tired of Waiting]

(...)

And luckily, general inflation is out of control at 4 to 5 per cent. So if housing is overvalued by 20 per cent, four or five years of flat property prices will give a real decrease in value of that order

(...)

Very interesting. Good find MS.

Only 1 little problem with his "easy" inflation solution: Inflation at 4 or 5% for 4 or 5 years, and base rate kept at 0.5%?

Impossible.

Our lenders (the "gilts market") are not that stupid.

[The Masked Tulip]

But without wages increasing 4-5%pa too (which they aren't) the houses won't be any easier to afford, in fact they'll be harder as your shopping costs 20% more.

[Injin]

I think the chap is perfectly right.

What I am very angry about is the lying by the authorities.

Why can't they tell ordinary people what they are really doing so they can know what to do - how to protect themselves, make the right decisions?

The authorities exist to rip you off.

They don't care about you at all. They never have, they never will.

[Darkman]

That's all fine and dandy.................except for the 'overvalued by 20%' bit.

It's all fine and dandy apart from the small detail that savers (who have no link to home-buyers outrageous debts) are the ones who pay for all this :angry:

[uptherebels]

It's all fine and dandy apart from the small detail that savers (who have no link to home-buyers outrageous debts) are the ones who pay for all this :angry:

Well yes, there is that too

[Har Fast]

I think the chap is perfectly right.

What I am very angry about is the lying by the authorities.

Why can't they tell ordinary people what they are really doing so they can know what to do - how to protect themselves, make the right decisions?

But they have. Read Merv's public utterances over the last couple of years and it's been perfectly obvious (albeit in Merv-speak) what they are doing, and will continue to do.

[Quiet Guy]

The authorities exist to rip you off.

They don't care about you at all. They never have, they never will.

+1

[Lambie]

The authorities exist to rip you off.

They don't care about you at all. They never have, they never will.

http://www.youtube.com/watch?v=mWlgK6lnE_E

the best carlin rant imo. may contain potty mouth.

[DeepLurker]

But without wages increasing 4-5%pa too (which they aren't) the houses won't be any easier to afford, in fact they'll be harder as your shopping costs 20% more.

That's not really a problem - Britain has a above-average rate of home ownership, around 80% IIRC, whereas France and Germany are (again, IIRC) closer to 60%, and have a perfectly functional market.

So we can imagine a decade or so of every single "Starter Home" being snapped up by BTLers and other investors - no need for any FTBers in this scenario.

The only trick needed for this to work is to ensure that Housing remains a safe and reasonably performing investment, i.e. that the returns are not too poor compared to e.g. shares. So far the government policies seem to be pointing towards house price stability, and the housing market could still play its current role of a safe place for Boomers and early genX-ers to park their retirement funds.

Edited April 5, 2011 by DeepLurker

[PopGun]

+1

+2

The fooking b4stard b*nsketer scum with their hands up the ar5es of their political puppets. I hope they all rot to death in their own 5hit!

[the flying pig]

very simplistic stuff from an blogger who lists a regular gig with 'Estates Gazette' as one of his main claims to fame.

"...He was property editor of the Investors Chronicle and Evening Standard and now contributes to Estates Gazette and other property publications. He is a freelance writer and broadcaster and sits on several awards panels."

http://dofonline.co.uk/blogs/the-edge/profile/

[campervanman]

Very interesting. Good find MS.

Only 1 little problem with his "easy" inflation solution: Inflation at 4 or 5% for 4 or 5 years, and base rate kept at 0.5%?

Impossible.

Our lenders (the "gilts market") are not that stupid.

Wot you mean those "unexpected temporary factors" cannot be used as an excuse for another 5 years?

[caparn]

HPC ahead of the curve again. Well done.

---

Interest rates were cut to save house prices – and banks

Why are UK interest rates so low? To curb inflation? To help industry? The real reason has been to save the housing market from collapse.

And why would the Bank of England, backed by politicians or all parties, want to save the housing market? Votes from homeowners? Not directly. It is because a slump in prices would leave a large part of the population with negative equity.

...

And luckily, general inflation is out of control at 4 to 5 per cent. So if housing is overvalued by 20 per cent, four or five years of flat property prices will give a real decrease in value of that order without actual prices having to move and thus without values falling below the mortgage amount. As prices are tied to earnings rather than retail prices, it might take a little longer unless wages take off.

"The Edge"

Richard Northedge takes on corporate finance

http://dofonline.co.uk/blogs/the-edge/interest-rates/uk-interest-rates-45645645/

The people it's protecting the most are the people who overstated their income for self certified mortgages and others who borrowed far more than they ever could have reasonably been expected to repay. They are the only ones who are struggling with interest rates and mortgage rates at the historic ever low.

[Injin]

The people it's protecting the most are the people who overstated their income for self certified mortgages and others who borrowed far more than they ever could have reasonably been expected to repay. They are the only ones who are struggling with interest rates and mortgage rates at the historic ever low.

No one borrowed anything.

[R K]

I think the chap is perfectly right.

What I am very angry about is the lying by the authorities.

Why can't they tell ordinary people what they are really doing so they can know what to do - how to protect themselves, make the right decisions?

Well I suppose they have in round about ways but you'd have to be pretty clued up to notice.

Charlie Bean told boomers they'd have to pay via devalued savings, or words to that effect.

Merv said in 07 or 08 we'd be having rather a long period of stagflation without actually calling it that and we are. He's also made clear that they're going to keep negative real rates for as long as they can get away with it and not responding to current infaltion and 'it's the levels stupid' i.e. cumulative numbers that he's looking at rather than year on year. Not forgetting they were ultra quick out of the blocks to devalue sterling so house prices fell in dollars by 30% almost immediately, clawing some of that back since. He's also more or less endorsed Osborne's fiscal tightening and told us that QE is a tool for supporting asset prices.

Grantley Chapps says he wants 'stable' house prices falling very modestly (2%) v wages over a prolonged period.

Lord 'All mouth and no trousers' Turner at the FSA opens his mouth and words fall out but never does anything much, whether its investigating RBS, clamping down on LTVs or anything else. So you know to ignore anything he says.

So I think overall they have set out their stall and 'told us' what that is. To date it appears to be working. I'm at a bit of a loss to see why it won't continue to 'work'.

[Sumsio]

If all is this is true then surely the best option for a first time buyer is buying in the next few months and getting the best tracker mortgage available?

If you find a house that you like and the mortgage interest works out to be less than what you are paying in rent to your landlord then surely buying would be a better option than renting now.

This is of course taking into account that you will not be earning interest on your deposit, paying building insurance etc. and settting aside funds for any maintenance issues that may arise with your new home.

The downfall in this plan is if the BOE raise interest rates, which would then make your mortgage interest payments greater than what you would be paying in rent. But with the economy in this current mess, could you reasonably foresee the BOE raising the interest rate anything about 1% over the next 5 years. Households have taken on so much debt that any interest rate above this would surely mean that many households would not be able to afford their mortgage repayments leading to them defaulting on their loans and causing another financial crisis for the banks / economy.

After 5 years you could then have paid a sufficient amount off your capital to afford your mortgage repayments if interest rates exceeded 1%. In the meantime you could also expect your salary to have risen somewhat and this compensating for the additional repayments.

It is also worth considering that your rental rates would also rise over this 5 year period anyway but you would also be earning more interest on any deposit you have in the bank.

This article and thread really has got me thinking that buying now is a good idea. I have previously been telling my parents and my girlfriends parents that the low rate is just seducing young first time buyers into buying as they can actually afford the repayments at today's interest rates but if they were to rise...then we would be in trouble (i.e falling house prices and higher repayments).

What I would really like to know is whether there are any strong reasons why the Bank of England may raise interest rates over the next couple of years? I'm getting more and more confused everyday!

[NEO72]

That's not really a problem - Britain has a above-average rate of home ownership, around 80% IIRC, whereas France and Germany are (again, IIRC) closer to 60%, and have a perfectly functional market.

So we can imagine a decade or so of every single "Starter Home" being snapped up by BTLers and other investors - no need for any FTBers in this scenario.

The only trick needed for this to work is to ensure that Housing remains a safe and reasonably performing investment, i.e. that the returns are not too poor compared to e.g. shares. So far the government policies seem to be pointing towards house price stability, and the housing market could still play its current role of a safe place for Boomers and early genX-ers to park their retirement funds.

Hmmm - an investment based on a depreciating asset and where your customers' ability to pay is being eroded and your government subsidies are being reduced.

I've got to be honest, I've come across better.

['Bart']

But without wages increasing 4-5%pa too (which they aren't) the houses won't be any easier to afford.

My first thought as well.

In fact, won't houses be less affordable as 4/5% inflation will soak up more of people's cash in other areas? Food and fuel for example.

[DTMark]

If all is this is true then surely the best option for a first time buyer is buying in the next few months and getting the best tracker mortgage available?

If you find a house that you like and the mortgage interest works out to be less than what you are paying in rent to your landlord then surely buying would be a better option than renting now.

This is of course taking into account that you will not be earning interest on your deposit, paying building insurance etc. and settting aside funds for any maintenance issues that may arise with your new home.

The downfall in this plan is if the BOE raise interest rates, which would then make your mortgage interest payments greater than what you would be paying in rent. But with the economy in this current mess, could you reasonably foresee the BOE raising the interest rate anything about 1% over the next 5 years. Households have taken on so much debt that any interest rate above this would surely mean that many households would not be able to afford their mortgage repayments leading to them defaulting on their loans and causing another financial crisis for the banks / economy.

After 5 years you could then have paid a sufficient amount off your capital to afford your mortgage repayments if interest rates exceeded 1%. In the meantime you could also expect your salary to have risen somewhat and this compensating for the additional repayments.

It is also worth considering that your rental rates would also rise over this 5 year period anyway but you would also be earning more interest on any deposit you have in the bank.

This article and thread really has got me thinking that buying now is a good idea. I have previously been telling my parents and my girlfriends parents that the low rate is just seducing young first time buyers into buying as they can actually afford the repayments at today's interest rates but if they were to rise...then we would be in trouble (i.e falling house prices and higher repayments).

What I would really like to know is whether there are any strong reasons why the Bank of England may raise interest rates over the next couple of years? I'm getting more and more confused everyday!

The BOE will have to raise interest rates eventually.

I've always maintained that they will hold off until it's already too late. Then they'll rise. Not just in the UK, either. By which time the BOE will have lost control of inflation - even on the falsified CPI measure - and rates could then rise again. And again. And again.

I'd suggest the main problem with the argument you advance is that that inflation in the price of essentials (fuel and food especially) will keep eating away at disposable income, and when that's done enough damage, then rates will rise on top of that.

[OnlyMe]

The BOE will have to raise interest rates eventually.

I've always maintained that they will hold off until it's already too late. Then they'll rise. Not just in the UK, either. By which time the BOE will have lost control of inflation - even on the falsified CPI measure - and rates could then rise again. And again. And again.

I'd suggest the main problem with the argument you advance is that that inflation in the price of essentials (fuel and food especially) will keep eating away at disposable income, and when that's done enough damage, then rates will rise on top of that.

Agree, it will be when they have already totally lost sterling, gilts and inflation in the economy is destroying whatever latent demand is left in the system from the core of non-ponzi consumers/mewers/finanical gamblers that the system has been so tilted to benefit.