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The Masked Tulip

This Guy Thinks Higher Mortgage Rates Will Not Crash Uk House Prices?

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http://www.marketoracle.co.uk/Article43160.html

I am sure that many people reading this will naturally conclude that higher interest rates will be a big negative for the housing market that could imply a bear market or even market crash. I am sure such expectations will become prevalent in the mainstream press as soon as interest rates start to rise, but I am going tell you now, long before even the first interest rate hike takes place that interest rate hikes are NOT going to make ANY difference to the housing bull market, for the rate rises would reflect a normalisation of the UK interest rate market and NOT a panic event.

Again the primary driver will be SENTIMENT!When house prices are rising at a pace that is more than people earn, will their mortgage costs rising by approx 1/3rd make such an impact on sentiment? I don't think so, not by the end of 2014 when the UK housing market will be rising by at least 10% per annum, or on average prices of £230k of about £23k per annum! TAX FREE! (own properties).So

1. Prepare for interest rate hikes long before anyone in the mainstream media or academics can imagine today.

2. That the rate rises will NOT result in a bear market or worse a crash as the trend momentum by then will have a couple of years under it's belt and the longer a trend goes on the more likely it is to continue towards the final blow off bubble stage, that would still be many years away.

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What a tube.

To be fair to Nadeem Walayat,his call back in 2009 of the beginning of a new stock bull market to beat all others was epic by any stretch.

Many UK cities have dropped in price since 2004.Bits of London have trebled since 2008.London may continue to boom over the next few years,but thus far,it hasn't taken Leeds,Nottingham,Leicester,Northampton etc with it.

Edited by Sancho Panza

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Again the primary driver will be SENTIMENT! When house prices are rising at a pace that is more than people earn, will their mortgage costs rising by approx 1/3rd make such an impact on sentiment?

Sentiment doesn't count for shit when house prices outstrip earnings and there is no way of offsetting that deficit by either MEW or erm, low interest rates.

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I can sort of see where he is coming from with people trying anything to get on the housing 'ladder' at the moment by taking on stupid mortgages, often at already high rates (HtB2). They are already putting themselves beyond what most of us would think of as reasonable affordability, so why worry about another few hundred quid a month when rates rise? Just turn the heating off and eats beans on toast while we wait for the big pay day when we sell the house at 300% profit.

Eventually, though, no one will be able to buy in at all. No begging, borrowing or stealing will be enough to get them a foothold, so it doesn't matter what their 'sentiment' is and if they think that they are on a one way bet to a big pay day. If they can't afford the entry price, the choice is taken away from them, and that is probably a good thing.

Take HtB2 itself. Reducing the deposit requirement to 5% may seem like a great idea to the government, but if that escalates the cost of a 2 bed flat for a first time buyer to £400k, how will they afford the £20k deposit, £16k stamp duty and £5k other fees that it will cost them to get into 'the best investment they will ever make'? Don't forget that the lucky ones amongst them will probably graduate into a £20k job with a £30k debt, so saving up £40k looks a long way away to me....

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Reducing the deposit requirement to 5% may seem like a great idea to the government, but if that escalates the cost of a 2 bed flat for a first time buyer to £400k, how will they afford the £20k deposit, £16k stamp duty and £5k other fees that it will cost them to get into 'the best investment they will ever make'?

Excellent point- I guess the cynical view is that the delay between HTB2 being launched and the resulting hpi will create an electoral window just big enough to crawl through.

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I suppose there's no logical reason why mortgage repayments have to be less than income. It could work like student loans, where the interest each month is just added to the capital owed.

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He's absolutely correct.

It may be counter-intuitive but policy rates will lag. That's what BoE are effectively saying with forward guidance, threshold contingent guidance or duration guidance.

The only time is won't be the case is towards the end of the next credit cycle when the yield curve inverts as in 06/7. Falling interest rates = falling house prices. i.e. AFTER the credit cycle has ended.

If you want to buy a house please be very careful fooling yourself into thinking rising int. rates will = falling house prices. Research what he's saying and you'll see he's spot on.

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He's absolutely correct.

It may be counter-intuitive but policy rates will lag. That's what BoE are effectively saying with forward guidance, threshold contingent guidance or duration guidance.

The only time is won't be the case is towards the end of the next credit cycle when the yield curve inverts as in 06/7. Falling interest rates = falling house prices. i.e. AFTER the credit cycle has ended.

If you want to buy a house please be very careful fooling yourself into thinking rising int. rates will = falling house prices. Research what he's saying and you'll see he's spot on.

I'd agree with that but I am unsure concerning his point regarding rising house prices. Even with HTB it is hard to see substantial upside from here but I haven't done the maths so could be wrong. Walayat is a bit overwrought and I am unconvinced he fully understands the underlying mechanisms but his bull market call was spot on.

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He's absolutely correct.

It may be counter-intuitive but policy rates will lag. That's what BoE are effectively saying with forward guidance, threshold contingent guidance or duration guidance.

The only time is won't be the case is towards the end of the next credit cycle when the yield curve inverts as in 06/7. Falling interest rates = falling house prices. i.e. AFTER the credit cycle has ended.

If you want to buy a house please be very careful fooling yourself into thinking rising int. rates will = falling house prices. Research what he's saying and you'll see he's spot on.

On the whole your posts seem completely bonkers to me and your sig is full of your own quotes! Which always amuses me when I see it.

Id like an explanation of how a higher cost of borrowing does not have a limiting effect on the amount that can be borrowed given a static income from which to repay please as Im clearly missing something fundamental. Dont just tell me to research it, explain it.

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He's absolutely correct.

It may be counter-intuitive but policy rates will lag. That's what BoE are effectively saying with forward guidance, threshold contingent guidance or duration guidance.

The only time is won't be the case is towards the end of the next credit cycle when the yield curve inverts as in 06/7. Falling interest rates = falling house prices. i.e. AFTER the credit cycle has ended.

If you want to buy a house please be very careful fooling yourself into thinking rising int. rates will = falling house prices. Research what he's saying and you'll see he's spot on.

He's arguing that Bank Rate will likely be 4.5% by the end of next year, but this won't interrupt what will be a strong bull phase for the UK housing market.

And you think he's absolutely correct?

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He's arguing that Bank Rate will likely be 4.5% by the end of next year, but this won't interrupt what will be a strong bull phase for the UK housing market.

And you think he's absolutely correct?

Its all explained here :

That the rate rises will NOT result in a bear market or worse a crash as the trend momentum by then will have a couple of years under it's belt and the longer a trend goes on the more likely it is to continue towards the final blow off bubble stage, that would still be many years away.

Apparently if something has been going on for a bit it will have to just keep on happening because its already been going on for a bit. So that explains that then.

Now just excuse me whilst I jump out of this 5th floor window. Im not concerned about the ground as by that stage I'd have been falling safely for several floors and that trend would therefore be set to continue.

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I cannot speak for RK but I don't agree with his prediction which is barking IMHO but the argument that interest rates will not rise until the debt has lowered to the point where people can absorb the rises and therefore house prices would not be significantly affected is correct.

I think I will read the full article in future and not just the quote supplied.

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the argument that interest rates will not rise until the debt has lowered to the point where people can absorb the rises and therefore house prices would not be significantly affected is correct.

Whose debt? If I buy a house shortly before they do rise I'm out of luck. There are lemmings joining the madness all the time. I agree the longer the low cost of borrowing continues the better for those already up to their necks in it, and if they hold out until they can afford cost of borrowing rises they might scrape by ok.. but you'd need to be pretty fortunate for that to happen. Its certainly not an expectation you should have when deciding how much you can afford to borrow?

Your argument also assumes a cost of borrowing rise is completely under some overall control by those looking after the best interests of the indebted. I don't know if thats true.

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Its all explained here :

Apparently if something has been going on for a bit it will have to just keep on happening because its already been going on for a bit. So that explains that then.

Now just excuse me whilst I jump out of this 5th floor window. Im not concerned about the ground as by that stage I'd have been falling safely for several floors and that trend would therefore be set to continue.

:lol:

Walayat has a quite unremarkable record as a forecaster. The online trading site CXO gave him a below average 40% Gruru Accuracy Rating in September 2012. They detail some of his recent hits and misses here. His style is of the research-lite oracular kind, dispensing revelations about the nature of the market that are apparent to him alone, despite the fact that CNBC, for instance, features a cast of permabulls spouting the same guff every day of the week: Buy, buy, buy, of course.

I call him the Stealth Boom Loon.

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Whose debt? If I buy a house shortly before they do rise I'm out of luck. There are lemmings joining the madness all the time. I agree the longer the low cost of borrowing continues the better for those already up to their necks in it, and if they hold out until they can afford cost of borrowing rises they might scrape by ok.. but you'd need to be pretty fortunate for that to happen. Its certainly not an expectation you should have when deciding how much you can afford to borrow?

Your argument also assumes a cost of borrowing rise is completely under some overall control by those looking after the best interests of the indebted. I don't know if thats true.

It isn't true. The market determines the cost of money not Ben Bernanke. US mortgage rates have been on a tear all year.

Biz-1-Graph-Mortgage-Rates1.jpg

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July 2003 the base rate was cut to 3.5% then it rose to a peak of 5.75% by Nov 2007. The Halifax housing peak was August 2007. Rising interest rates did not make house prices fall then. If banks have people wanting to borrow money to buy houses, they have to pay interest rates to get money in from savers.... well..... they did before the Funding for Lending Scheme theft, which is being used to make savers pay the bank fines for PPI etc.

http://www.housepricecrash.co.uk/graphs-base-rate-uk.php

http://www.housepricecrash.co.uk/indices-halifax-national.php

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Thought I'd take a look at UK data. Obviously past does not necessarily predict future and we're in extraordinary circumstances now as far as monetary policy and government initiatives go. Thought it may be interesting though.

hU4223r.jpg

This would seem to give some merit to the argument that rising rates wont bring down prices, well more they won't bring down prices straight away so supporting the trend/ momentum argument a bit.

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:lol:

Walayat has a quite unremarkable record as a forecaster.

To be fair though,that's true of most forecaster's.

The great thing,if I remember it correctly,about his bull market call in 2009 was that he got it right for all the wrong reasons.

But who really cares?

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July 2003 the base rate was cut to 3.5% then it rose to a peak of 5.75% by Nov 2007. The Halifax housing peak was August 2007. Rising interest rates did not make house prices fall then. If banks have people wanting to borrow money to buy houses, they have to pay interest rates to get money in from savers.... well..... they did before the Funding for Lending Scheme theft, which is being used to make savers pay the bank fines for PPI etc.

http://www.housepricecrash.co.uk/graphs-base-rate-uk.php

http://www.housepricecrash.co.uk/indices-halifax-national.php

I'd argue the following.

Firstly, people borrowing money to buy houses don't examine the rates and then decide whether or not to purchase based on the risk profile that the present value of rates and their future possible path implies. I posted a link to this a few days back because it's quite striking to see a Bank of England official making it one of the key findings of his review into the long run sustainability of the UK mortgage market.

A great many households – particularly amongst first-time buyers – attach overwhelming weight to the initial monthly repayment on mortgages. They focus much less on where the burden of debt repayments might be some way ahead, even though mortgage debt is long-lived. And where debt is at variable rates there is great uncertainty about how affordability will evolve.

Source: The UK Mortgage Market: Taking a Longer-Term View, David Miles, March 2004

What Miles doesn't address anywhere is the idea of a mortgage which is interest only for the whole of its 25-year term, and where there was no capital repayment vehicle whatsoever.

What these arguments about how rates will influence prices fail to engage with is that they only have explanatory power if rates were the only variable influencing the path of prices that changed during that time period, when of course that analysis is miles off. Between the time when Miles would have been preparing the Miles report and when the Bank of England was gently winding up rates from their 2003 lows the securitisation machine was firing up in the UK and lots of mortgages were being written where the monthly mortgage payment was interest only.

Many somewhat financially inexpert individuals were continuing to use the 'monthly payment model' in order to evaluate whether or not to buy or rent, (regardless that they were now only paying the interest), and with prices screaming up and non-stop ramping from all quarters, they continued piled into these mortgages.

What drives prices is not rates in and of themselves, but changes in the provision of credit by banks and bank-like mortgage lenders. During the last phase of the inflation of the bubble, yes rates did rise, but that signal would have been wholly drowned out by a move to interest only borrowing, rather than repayment, and secondly, the weakening of credit evaluation policies by the lenders - which simply ceased to exist: Eric's liar loans, (just because he's getting a little lazy about reminding people, it doesn't stop being true - only teasing, Eric! :P )

Now, at some point rates will rise and unless it is offset by an accompanying weakening of credit evaluation practices this means that individuals, who on the balance of probabilities will still be using their 'monthly payment model' in order to decide whether or not to buy, will be paying less, because the increased rates will have reduced the amount that they can borrow as keeping to the same monthly payment necessitates a smaller principal on the mortgage; a smaller loan means a smaller selling price.

Now, if you see a return to interest only lending at very high LTV and the return of self-certification, then all bets are off. With rates significantly lower than they were just before the boom, someone with access to a self-certified high-LTV interest only mortgage and applying the tried and trusted 'monthly payment model' for assessing risk and value might see a transaction that they'd enter into. However, it'd be a financial suicide note and another nail in the coffin of the UK ever recapitalising its banks.

The permanent removal of interest only to new entrants is non-trivial. The transition back to a model where banks hold mortgages on their balance sheets from the securitisation model that brought us the Greatest Hits of Northern Rock, Britannia and the like is non-trivial - because it means that once again loan balances cannot get completely out of touch with earnings. People who see a path that includes house prices rising need to explain where this credit is going to come from. We know how we got here, (shitty lending). We know why the weak borrowers are able to hang on to these comedy prices (ZIRP and forbearance) but without massive wage inflation and a return to really shitty lending, I cannot see how prices can move up from here.

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