Mortgage Rise Will Plunge A Million Homeowners Into Perilous Debt

[giesahoose]

http://www.theguardian.com/money/2013/dec/28/mortgage-rise-homeowners-perilous-debt

High prices leave buyers exposed to interest rate rise. i don't know about you but i am shocked, SHOCKED i tells you

[The Knimbies who say No]

"A million homeowners" should read "a small minority of homeowners".

[workingpoor]

25% of the population paid for Xmas on credit

That's gotta be a sign.

And home loans at 6-7x annual take home pay is unsustainable

The're will be no wage inflation

The population is increasing rapidly

Supply & demand (a surplus of labour will keep wages down)

Edited December 29, 2013 by workingpoor

[rantnrave]

2nd most read story on the Guardian site in the last 24 hours.

[bristolhunter]

25% of the population paid for Xmas on credit

Confusing stats - 25% paid for christmas "by borrowing", whilst "overall 42% paid for it on credit cards, loans or overdrafts".

What exactly do the grauniad think these things are if not borrowing?

[rantnrave]

Confusing stats - 25% paid for christmas "by borrowing", whilst "overall 42% paid for it on credit cards, loans or overdrafts".

What exactly do the grauniad think these things are if not borrowing?

I paid for Christmas on credit card. I earned 1% cashback on that and will pay it all off before incurring any interest. Presumably I have contributed to these statistics.

[bristolhunter]

I paid for Christmas on credit card. I earned 1% cashback on that and will pay it all off before incurring any interest. Presumably I have contributed to these statistics.

Fair enough as behaviour - but doesn't explain the sloppy distinctions. (And I doubt you've got 17% of the population as company)

[rantnrave]

This is their front page story for tomorrow btw

[workingpoor]

Maybe the 25% used payday loans

And the rest (the difference up to 42%) used CC's OD's and bank loans.

[workingpoor]

This is their front page story for tomorrow btw

Nice bit of mid- Xmas cheer are they turning into the MAIL?

[JonathanR]

http://www.theguardian.com/money/2013/dec/28/mortgage-rise-homeowners-perilous-debt

High prices leave buyers exposed to interest rate rise. i don't know about you but i am shocked, SHOCKED i tells you

Of course, it's stories like this that the government uses as an excuse to not raise interest rates.

[Bland Unsight]

Of course, it's stories like this that the government uses as an excuse to not raise interest rates.

UK mortgage rates are controlled not by the Bank of England policy rate but by the banks' marginal cost of funding.

Over the short term the interest rate on an instant cash ISA gives you a heads up on the lower bound for the cost of funding (plus a little for all the aggravation and the fact that deposits can be withdrawn). Over the longer term, the 10 year gilt rate tells you where a sensible man would bet his bank's balance sheet on interest rates being in the medium term.

The Bank of England have brought down interest rates over the near term with Funding for Lending. I'm inclined to the view that they they were upfront about why they did this: to recapitalise the banks by ensuring a good spread between SVRs and the effective interest paid by the banks on the money that they borrowed to fund their lending.

Going out on a limb here, but my read is that the powers that be have continually underestimated the extent to which their intention to deleverage private households and to reduce the levels of credit extended against UK property would be undermined by the devotion of the UK household to UK property as the only way to get rich.

My read is that post 2008 intervention which were meant to arrest the rapidity of the descent of the banks actually led to a re-inflation of the bubble. IMO that was pure cack-handedness by the Bank of Engalnd/FSA. They should have reformed the lending practices before they dropped the interest rates. Once lending practices were fixed by the FSA Mortgage Market Review (or certainly once the direction of travel was mapped out) things cooled down a little.

The next chapter was Osborne's Help to Buy. I go along with the view that this was madness, pure and simple. A cynical attempt to stoke an credit fuelled house price boom in order to send some economic indicators in the right direction in order to make the Tory government more electable. Now, I don't disparage the Tories for doing that - goodness knows their Labour predecessors did far worse with the window of opportunity for reform and renewal that existed in 2008-2010...

The problem with the Help to Buy move is that I suspect it may run out of legs before it reaches the finish line.

At the heart of the matter is what really sets interest rates - and in particular mortgage rates. In the presence of massive intervention by the US Treasury what sets rates is what the Treasury wants rates to be. But as the matter is put by the Bernanke, as the Fed balance sheet grows, the difficulty in managing the Fed balance sheet also grows. There is an end point to the extent to which the Fed can control the risk free rate because all the Fed can really do is transfer risk between parties. In order to eliminate risk, or change it in any significant way, the Fed would need to operate politically - its powers to do this are not zero, but they ain't all that. Crucially the source of risk is the financial sector. All it is really doing is moving the risks that the financial sector is creating by making bets with borrowed money and heaping those risks onto households. The extent to which households can bear those risks is finite, the extent to which the financial sector can enrich its employees by shipping out risk is limited only by the extent to which it can ship out risk. The dogs in the street know all this. The apparatchiks at the Fed know that the game has to end at some point.

Hence at some point Fed intervention ends and mortgage rates come to reflect the inherent risk.

The world is a chaotic mess, but what leads you into the greatest error is reasoning premised on things that you thought were definitely true but were actually false.

Back in 2003 anyone with a brain in their head would have said that houses in the South East and London were wildly over-priced. Today many people are willing to entertain the fact that these houses are not over-priced not because the facts have changed in the meantime but simply because they have habituated to these prices.

A 2003 price was pretty wild on 2003 earnings. Earnings haven't done much since 2003. Mortgages rates are being suppressed by the monetary policies which will end.

Stay out of property, unless you have money to burn.

[Venger]

Back in 2003 anyone with a brain in their head would have said that houses in the South East and London were wildly over-priced. Today many people are willing to entertain the fact that these houses are not over-priced not because the facts have changed in the meantime but simply because they have habituated to these prices.

And because many people are owners and proudly think of that equity as locked in. Their inflated wealth, constantly ticking over how much they are now worth. Counting on Gubbermint move everything to do that, with Call me Dave out like a shot to SE voting home-owners after the flood. Piece I read the other day had a comment left by "An older home-owning voter" to risk of about 25 new houses being built across the way from her.

An existing paradigm is seldom dispelled by evidence alone. Such systems of belief possess a resilience which makes them virtually immune to external argument. A people whose culture grossly misinterprets certain facts will not necessarily reason their way to a more encompassing world-view until force to do so by the brunt of economic necessity or military defeat. Reason does not alter values.

Of course, it's stories like this that the government uses as an excuse to not raise interest rates.

Sigh, so true.

[mr messy]

good , lets raise interest rates , for too long now people who have been careful with money and saved have been subsidising people with mortgages which has helped house prices to continue rising . and befor anyone tells me how hard it is out there , well change the record I have seen the shops over xmas and they have been rammed . we need house prices to fall for the sake of future generations and putting interest rates up is the only way

[olliegog]

UK mortgage rates are controlled not by the Bank of England policy rate but by the banks' marginal cost of funding.

Over the short term the interest rate on an instant cash ISA gives you a heads up on the lower bound for the cost of funding (plus a little for all the aggravation and the fact that deposits can be withdrawn). Over the longer term, the 10 year gilt rate tells you where a sensible man would bet his bank's balance sheet on interest rates being in the medium term.

The Bank of England have brought down interest rates over the near term with Funding for Lending. I'm inclined to the view that they they were upfront about why they did this: to recapitalise the banks by ensuring a good spread between SVRs and the effective interest paid by the banks on the money that they borrowed to fund their lending.

Going out on a limb here, but my read is that the powers that be have continually underestimated the extent to which their intention to deleverage private households and to reduce the levels of credit extended against UK property would be undermined by the devotion of the UK household to UK property as the only way to get rich.

My read is that post 2008 intervention which were meant to arrest the rapidity of the descent of the banks actually led to a re-inflation of the bubble. IMO that was pure cack-handedness by the Bank of Engalnd/FSA. They should have reformed the lending practices before they dropped the interest rates. Once lending practices were fixed by the FSA Mortgage Market Review (or certainly once the direction of travel was mapped out) things cooled down a little.

The next chapter was Osborne's Help to Buy. I go along with the view that this was madness, pure and simple. A cynical attempt to stoke an credit fuelled house price boom in order to send some economic indicators in the right direction in order to make the Tory government more electable. Now, I don't disparage the Tories for doing that - goodness knows their Labour predecessors did far worse with the window of opportunity for reform and renewal that existed in 2008-2010...

The problem with the Help to Buy move is that I suspect it may run out of legs before it reaches the finish line.

At the heart of the matter is what really sets interest rates - and in particular mortgage rates. In the presence of massive intervention by the US Treasury what sets rates is what the Treasury wants rates to be. But as the matter is put by the Bernanke, as the Fed balance sheet grows, the difficulty in managing the Fed balance sheet also grows. There is an end point to the extent to which the Fed can control the risk free rate because all the Fed can really do is transfer risk between parties. In order to eliminate risk, or change it in any significant way, the Fed would need to operate politically - its powers to do this are not zero, but they ain't all that. Crucially the source of risk is the financial sector. All it is really doing is moving the risks that the financial sector is creating by making bets with borrowed money and heaping those risks onto households. The extent to which households can bear those risks is finite, the extent to which the financial sector can enrich its employees by shipping out risk is limited only by the extent to which it can ship out risk. The dogs in the street know all this. The apparatchiks at the Fed know that the game has to end at some point.

Hence at some point Fed intervention ends and mortgage rates come to reflect the inherent risk.

The world is a chaotic mess, but what leads you into the greatest error is reasoning premised on things that you thought were definitely true but were actually false.

Back in 2003 anyone with a brain in their head would have said that houses in the South East and London were wildly over-priced. Today many people are willing to entertain the fact that these houses are not over-priced not because the facts have changed in the meantime but simply because they have habituated to these prices.

A 2003 price was pretty wild on 2003 earnings. Earnings haven't done much since 2003. Mortgages rates are being suppressed by the monetary policies which will end.

Stay out of property, unless you have money to burn.

+1

an excellent summary of why we are in such a mess and why mortgage holders (not homeowners) will have to re-think their finances.

[spyguy]

UK mortgage rates are controlled not by the Bank of England policy rate but by the banks' marginal cost of funding.

Over the short term the interest rate on an instant cash ISA gives you a heads up on the lower bound for the cost of funding (plus a little for all the aggravation and the fact that deposits can be withdrawn). Over the longer term, the 10 year gilt rate tells you where a sensible man would bet his bank's balance sheet on interest rates being in the medium term.

- snip -

A 2003 price was pretty wild on 2003 earnings. Earnings haven't done much since 2003. Mortgages rates are being suppressed by the monetary policies which will end.

Stay out of property, unless you have money to burn.

Yep.

On the subject of cost of mortgages and the BoE base rate, I don't remember a time when the BoE base rate has been lower than the 10Y yield for any length of time.

You can make an argument that if the BoE intended to re-fi the banks they should have worked on sorting out how the banks could break or collar they're tracker mortgages BEFORE they lowered the BoE rate below most banks funding cost.

I know a couple of people with BoE base rate + 0.20 of something.

These deals most be costing banks a fortune.

They might have hedged some of the funding for a period of time but I doubt they've hedged the full amount for the full term.

Typically, banks costs run about 2% over they're funding costs.

Probably 3% to 4% with the amount of cr.p banks loaned out 2002-2007.

Agreed on the stupidity of BoE not sorting out bank loan criteria before intervening.

Agreed on the 2003 prices being way too high.

Don't just concentrate on the SE though. Places in the North still have extreme PE values - my home town is 10+.

In some respects these are worse than the SE as there are are less jobs.

On a separate point, despite the Greenspan years, I think the Fed is much more democratic/diverse than the BoE.

The Fed has a large board, spread across the US.

The BoE is chaired (more dictator) by one person composed and staffed by people mainly in London.

I think the Fed has accepted the dangers and damage low rates and QE are causing.

My main critisism of the BoE and QE is that such a policy would require an all-seeing, all-knowing, almost omnipresent BoE able to tweak and re-balance.

But if the BoE had even a fraction of those powers then there would be no need to use i.e. they would be able to see the problems coming.

The fact that the BoE was involved during a period (2002-2007) which saw the ~70% of the banks (by lending) fail / go bust should result in some extreme re-evaluation, some of which is happening the bond market now.

[Bruce Banner]

This thread just about sums up the problem in the UK today, endless pity stories about saving those who are forever taking on debt. What about the millions who may will be GOING WITHOUT rather than taking on loans for stuff that are not essential and then bleating about it months later.

How about getting the people in the UK in a frame of mind where they are worried about debt, even scared of it. I am thinking most of the time these days why do I keep the heating down, I eat sensibly and cheaply, even got my hands on a good supply of wild rabbits and cooking apples this year for example and had some amazing stews and apple pies.

Why am I scrimping and saving knowing that this is the right thing to do in these tough times while all the pity and help goes to those that just do not give a s***.

I will turn the TV on later and I can guarantee there will be endless gambling adds and wonga type adverts, thats what is causing the problems in the UK today, not interest rates.

Just to keep this on housing and on topic, even though I could go about the evils of gambling and borrowing at 2000% APR.

The real problem today is the man/woman with the £100k mortgage when they really should have only a £50k one, the problem is not interest rates, it is the size of the loans.

Ok this article trys to pull the heart strings of those in debt, I could also become one of them and also borrow well over what I am able to afford to buy myself a home, but I am not so stupid. So I am and I suspect many of you are not classed as one of those million potential "victims", yet we suffer in silence in a worse way and there are probably millions of us who are not so stupid as to get themselves in so much debt.. and yes MORTGAGES ARE DEBT.

I can't disagree with any of that.

[winkie]

This thread just about sums up the problem in the UK today, endless pity stories about saving those who are forever taking on debt. What about the millions who may will be GOING WITHOUT rather than taking on loans for stuff that are not essential and then bleating about it months later.

How about getting the people in the UK in a frame of mind where they are worried about debt, even scared of it. I am thinking most of the time these days why do I keep the heating down, I eat sensibly and cheaply, even got my hands on a good supply of wild rabbits and cooking apples this year for example and had some amazing stews and apple pies.

Why am I scrimping and saving knowing that this is the right thing to do in these tough times while all the pity and help goes to those that just do not give a s***.

I will turn the TV on later and I can guarantee there will be endless gambling adds and wonga type adverts, thats what is causing the problems in the UK today, not interest rates.

Just to keep this on housing and on topic, even though I could go about the evils of gambling and borrowing at 2000% APR.

The real problem today is the man/woman with the £100k mortgage when they really should have only a £50k one, the problem is not interest rates, it is the size of the loans.

Ok this article trys to pull the heart strings of those in debt, I could also become one of them and also borrow well over what I am able to afford to buy myself a home, but I am not so stupid. So I am and I suspect many of you are not classed as one of those million potential "victims", yet we suffer in silence in a worse way and there are probably millions of us who are not so stupid as to get themselves in so much debt.. and yes MORTGAGES ARE DEBT.

...you have just about summed up the new UK today......and they are calling it progress.

[giesahoose]

this part of the story concerned me, no idea what he is talking about.

"Matthew Whittaker, senior economist at the Resolution Foundation, said ministers should consider "locking in" cheap credit for those who are heavily indebted. He added:"Even if we take a somewhat rosy view of how the economy will develop over the next few years, the number of households severely exposed to debt looks as though it will double."

[bearwithasorehead]

this part of the story concerned me, no idea what he is talking about.

"Matthew Whittaker, senior economist at the Resolution Foundation, said ministers should consider "locking in" cheap credit for those who are heavily indebted. He added:"Even if we take a somewhat rosy view of how the economy will develop over the next few years, the number of households severely exposed to debt looks as though it will double."

Presumably an extension of HTB for those already with mortgages. They could indemnify people on trackers or fixes, couldn't they, by guaranteeing part or all of the loan.

Scary thought.

[silver surfer]

we need house prices to fall for the sake of future generations and putting interest rates up is the only way

Putting up interest rates would lower house prices, but that would mainly benefit cash rich buyers. So even though it would make houses cheaper it wouldn't make them any more affordable for those buyers needing a mortgage. In any event the argument's moot, interest rates are unlikely to meaningfully increase for many years to come.

The better way of helping future generations would be a sustained and massive programme of house building, especially in the south-east and near employment hot spots like Cambridge. We currently build about 100,000 homes a year in this country, but in the 1930's, with a much smaller population, we built 300,000 homes a year. If we could do it then there's no reason why, given the political will, we couldn't do it now.

Boris Johnson's scheme for a new airport east of London is a case in point. It could shift London's centre of gravity east and be the trigger for hundreds of thousands of new (non flood plain) properties in Essex and Kent. That's a project that could make a real, long term difference.

[winkie]

Putting up interest rates would lower house prices, but that would mainly benefit cash rich buyers. So even though it would make houses cheaper it wouldn't make them any more affordable for those buyers needing a mortgage. In any event the argument's moot, interest rates are unlikely to meaningfully increase for many years to come.

The better way of helping future generations would be a sustained and massive programme of house building, especially in the south-east and near employment hot spots like Cambridge. We currently build about 100,000 homes a year in this country, but in the 1930's, with a much smaller population, we built 300,000 homes a year. If we could do it then there's no reason why, given the political will, we couldn't do it now.

Boris Johnson's scheme for a new airport east of London is a case in point. It could shift London's centre of gravity east and be the trigger for hundreds of thousands of new (non flood plain) properties in Essex and Kent. That's a project that could make a real, long term difference.

The reason why they are not building the homes is because the government don't have the money and won't borrow it...and the private landowners/land buyers will not build because they want a certain price and the people who need a home to rent or buy do not have enough income to rent or buy at their price....what comes first the jobs or the homes?

[silver surfer]

The reason why they are not building the homes is because the government don't have the money and won't borrow it...and the private landowners/land buyers will not build because they want a certain price and the people who need a home to rent or buy do not have enough income to rent or buy at their price....what comes first the jobs or the homes?

I'm not convinced. I think the central reason we're not building more houses is NIMBYism, especially when it's enfranchised in batty schemes like green belts. Make low price land available in the areas where the jobs are and low price houses will follow.

[slacker]

this part of the story concerned me, no idea what he is talking about.

"Matthew Whittaker, senior economist at the Resolution Foundation, said ministers should consider "locking in" cheap credit for those who are heavily indebted. He added:"Even if we take a somewhat rosy view of how the economy will develop over the next few years, the number of households severely exposed to debt looks as though it will double."

1) Only a fraction of homes are mortgaged

2) Even if they locked it in it would reset on selling property

3) New borrowers would be at a higher rate so impact on values would persist - you would just be locking-in every increasing negative equity

There is an argument for banks to provide 30yr avg rate loans at 3x/80%, maybe with some government guarantee mechanism in place - but bailing out people on trackers is nuts and a sure election loser with the blue rinsers.

The biggest impact of rising rates won't be in defaults it will be in the wealth effect decline from a market correction. This country needs new sources of wealth generation which don't involve tulip derivatives.

My concern here is the media change in narrative over Christmas - it feels like it is being steered - is some situation worse that we currently know? (various yields indicating there is).

[cybernoid]

"Mortgage Rise Will Plunge A Million Homeowners Into Perilous Debt"

Its the inevitable mortgage cost rise that plunges them into perilous debt is it? Not being fking stupid in the first place and borrowing more than you can afford to repay with rates at 300 year lows then. Oh no. Someone else's fault.

They are already in 'perilous debt'. They did it to themselves on the day they took out the mortgage.

I don't see many stories about the much larger number of more responsible people who have gone without security of tenure by renting instead of loading up on 'perilous debt'. They/we are the victims of this. Not the clowns who priced us all out of a home.

Get these idiots out of the houses they cannot afford so the rest of the country can start to recover. It can't come fast enough.