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silver surfer

Ultra Low Interest Rates Here To Stay

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Or so says The Telegraph,

http://www.telegraph.co.uk/finance/comment/jeremy-warner/11373011/Sadly-for-all-our-futures-cheap-money-is-here-to-stay.-Just-get-used-to-it.html

Assume for a moment that interest rates will remain very low (I think it is correct, but I recognise not everyone agrees), what are the implications? If it is correct what actions does the sensible person take?

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I've been saying this for goodness knows how long.

#turningjapanese

Does anyone seriously think that low or -ve rates means the economy IS IN A GOOD SHAPE??? It's a bl00dy brilliant set up for a HUUUUUGE HPC. BRING IT ON!!!

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Does anyone seriously think that low or -ve rates means the economy IS IN A GOOD SHAPE??? It's a bl00dy brilliant set up for a HUUUUUGE HPC. BRING IT ON!!!

Surely it's rising interest rates that would depress house prices.

Low but stable interest rates just keeps house prices high but stable. Still bad news for BTL and highly indebted recent house buyers, as there's no prospect of house price inflation without further interest rate falls, but not the conditions for a house price crash.

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If that is the trend, purchase of everything by those with the lowest borrowing rate - i.e. the 1%, in the process large companies swamp small enteprise, total collapse in small/medium independent company involvement in the economy, almost like a soviet style economy but driven by access to virtually free credit, big companies who do not even have to be profitable just keep borrowing till they monopolize the market, in fact that would be the pitch to the banks, lend us more and we can guarantee destroying the competition..

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Surely it's rising interest rates that would depress house prices.

Low but stable interest rates just keeps house prices high but stable. Still bad news for BTL and highly indebted recent house buyers, as there's no prospect of house price inflation without further interest rate falls, but not the conditions for a house price crash.

Asset prices perform quite well during periods of low and rising rates.

They falter after rates have been "high" for a period i.e. a curve inversion at the end of the cycle and fall as rates fall (generally)

Moderate rate rises probably signifies slowly rising asset prices.

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Surely it's rising interest rates that would depress house prices.

Low but stable interest rates just keeps house prices high but stable. Still bad news for BTL and highly indebted recent house buyers, as there's no prospect of house price inflation without further interest rate falls, but not the conditions for a house price crash.

Tell that to people who bought in Japan in 89/90.

Low interest rates kill the velocity of the money supply which strangles economic growth.

Economic stagnation is unavoidable.

If wages start rising,wake me up.

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If the rich aren't spending how can the poor pay high interest rates?

They are trickling on us.

You give them printed money,

they buy something like this:

350px-18th_century_mansion_built_of_Bath

you work for them for minimum wage.

Well done Gordon, you saved us, a real labour man, a real man of the people.

Edited by TheCountOfNowhere

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Assume for a moment that interest rates will remain very low (I think it is correct, but I recognise not everyone agrees), what are the implications? If it is correct what actions does the sensible person take?

I saw an economist chap on the telly last night, who mentioned in a brief throw away line, that low interest rates in theory shouldn't affect the savings of the population, because although you're not getting interest on your savings, you also pay less on your debts, so the money you save on your payments, you should be adding towards your savings.

Of course, that's for the population as a whole, for individuals it only works if you have debts and savings.

He didn't mention it, but of course it also would require some disincentive to stop people speculating up prices

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If you look longer term interest rates are low but not as low as we might think:

https://jrvarma.wordpress.com/2009/01/12/uk-official-interest-rate-at-315-year-low/

Our major growth is clearly done for now. An interest rate of a few percent is more "normal" historically than the interest rates of the 70s/80s.

But I don't believe that that means cash isn't going to be worth anything. That depends on how the governments react (more QE etc) and the currency markets.

Bring on deflation please.

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Not at all

Asset prices perform quite well during periods of low and rising rates.

They falter after rates have been "high" for a period i.e. a curve inversion at the end of the cycle and fall as rates fall (generally)

Moderate rate rises probably signifies slowly rising asset prices.

By what mechanism?

I can see that it makes sense that when rates rise the cost of borrowing rises. No disagreement there?

I can borrow less when the cost of borrowing is higher. Any disagreement with that?

What I can borrow determines what I can pay for a house. Ok with that?

What a house sells for depends on what can be paid. Yes?

That is the mechanism by which rising rates reduces house prices.

Please explain yours. I don't understand.

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I've been saying this for goodness knows how long.

#turningjapanese

Does anyone seriously think that low or -ve rates means the economy IS IN A GOOD SHAPE??? It's a bl00dy brilliant set up for a HUUUUUGE HPC. BRING IT ON!!!

^ This. Silver Surfer is smart and wise, full of interesting posts, seen previous HPCs, but doubts future HPC so he can upsize, if that is still his plan (from his 2011ish house purchase), imo. Too many owners/buyers are as complacent about house prices, as your professor guy was with his all-in IBM shares, way-back-when. Low rates, still doesn't mean new buyers will always be prepared to borrow, to pay high prices. Next crunch will be from buyers falling away from market, leaving owners/sellers stranded - imo.

There is a structural impediment that limits the price reduction of credit. Nominal interest rates in the banking system cannot fall below zero. Banks cannot pay people to take money away. Furthermore, people who borrow money must be able to retire their debt. This limits the willingness of creditors to lend and of borrowers to use the available reserves to create loans. At interest rates above zero, investment generated by new debt must produce a rise in income higher than the interest rate, and sufficient to amortize the principal. Otherwise, any additional debt is contractionary.

This was for Australia last summer, but similar market variables in play here. The FTBs are going all in, BTLers doubling down... who is going to be left to buy low-mid-high prime at the prices owners think they are worth? HPC. Just needs a turn in the market somewhere, to cause cascades everywhere else - maybe it is already occurring.

15 June 2014

What may not be immediately apparent is that the pace of growth has slowed significantly for both owner-occupiers and investors over the past six months. On a trend basis, growth in the value of loan approvals to owner occupiers slowed to 0.1 per cent in April (compared with 1.7 per cent in October) while for investors, growth slowed to 0.5 per cent (compared with 4.0 per cent in September).

This should come as little surprise, though to the best of my knowledge it has received little emphasis elsewhere, and is a trend that we should keep an eye on. Low interest rates have encouraged owner-occupiers and investors to bring their purchases forward, but that eventually creates a void that must be filled.

If it can’t be filled — and it is unlikely that anything can replace investor speculation — then loan approvals will tank and house prices, which are demand-driven, will inevitably follow suit. Certainly, investor demand is unlikely to be replaced by loan approvals to first home buyers, which fell by 7 per cent in April on a seasonally adjusted basis to be 9 per cent lower over the year.

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Real interest rates are rising are they not? My 2x 2.4% cash ISAs to 2018 are going to look not too bad in the deflationary environment, especially given that it is tax free.

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Extremely low rates reflecting a devastated economy and they do massive damage to the economies long term flexibility and long term prospects. The base rate is even lower than during World War 2 suggesting that rather than globalisation being beneficial for countries like the UK in actual fact countries are effectively on a war footing. The devastation isn't to infrastructure but to significant numbers of people and significant amounts of business - except for the likes of banking and the crony politicians.

Even Mrs Lagarde at the top of the IMF said she didn't know what was happening when Switzerland ditched the euro - and the oil price dropped just like that starting a few months ago. The political outcome in Greece wasn't expected just a few months ago. It's a question of who is going to drop the next one and where's the next one going to drop (economically speaking). Maybe Greece again, could be another of the PIIGS, maybe the UK general election result or maybe even the house price market .............

Indeed extreme malinvestment and a difficult situation to know what to do for certain unless you're an insider. Possibly more so than since records began.

Edited by billybong

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Buy with low interest rates....bankers raise interest rate 0.25% every year.

They could effectively squeeze your income for 2 or 3 decades.

Suddenly, it doesn't look like a good deal.

It's time this whole charade ended and the bankers paid the price.

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Assume for a moment that interest rates will remain very low (I think it is correct, but I recognise not everyone agrees), what are the implications? If it is correct what actions does the sensible person take?

A sensible person cannot assume anything.

The cost of borrowing over the mortgage term is what matters when you're buying a house, if you're buying with a mortgage. A sensible person cannot presume to know that borrowing cost over that period, 25+ years. Only 10 years ago the landscape was quite, quite different.

A sensible person has to plan for the worst and hope for the best. You would need to make an assumption for an average mortgage rate over those 25 years, and set your budget based on that. It should be an overestimate to minimise risk. It certainly shouldn't be todays floor value.

The best thing to do is buy without a mortgage, or with a very small mortgage. Do this by getting some cash together, or buying a cheaper house. Or a bit of both. Don't assume prices will rise from here, and pay what the shelter is worth to you. Its not an investment.

What other option is there?

Plainly, committing to a large mortgage you can just about pay in your high income years when the cost of borrowing is on the floor, is absolutely crazy. Even if the powers that be could save you from yourself, and do so via their manipulations, the sleepless nights alone wouldn't be worth it.

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By what mechanism?

I can see that it makes sense that when rates rise the cost of borrowing rises. No disagreement there?

I can borrow less when the cost of borrowing is higher. Any disagreement with that?

What I can borrow determines what I can pay for a house. Ok with that?

What a house sells for depends on what can be paid. Yes?

That is the mechanism by which rising rates reduces house prices.

Please explain yours. I don't understand.

A guy back there said it: Japan. #turningjapanese is # I coined on Twitter.

We are in the fall out of a generational debt bubble. Enjoy. But be patient. TPTB are doing everything they possibly can to stop it. Including telling the masses paying more for goods and services is good for you. HAHAHAHAHA

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JUst had a look at some mortgages with these mega low interest rates.

You can borrow £300K for...wait for it.....£1500K a month on a 5 year fixed.

Where as, when rates were 5%, you could borrow this much for about £1700 a month.

You can borrow on a 2 year fixed at a lower cost but....but that says a lot about what is going to happen after 2 years.

Wasn't the start of the london mega bubble FLS sub prime pre-eleciton tory give away about 21 months ago.......tick tock.

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