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LazyDay

Boe's Dilemma

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Mortgage repayments inflation index is calculated by the Office for National Statistics and can be compared to the general inflation index (RPI excl. mortgage repayments) over the last 20 years. Both indices are normalised to 1 for Jan 1987. I took the ratio of the former to the latter to get the mortgage inflation relative to the overall inflation. This shows how expensive are the monthly mortgage repayments relative to all the other goods in the economy. It takes into account dynamics in mortgage rates and all the dynamics in average amount borrowed per household.

If we set this new index for relative mortgage costs to 1 for Jan 1987 we can see that for the last 20 years it shot higher than 1.6 only once – shortly before the last crash. Its current value is 1.55 (see Excel graph attached). This means that by foregoing your chance to have a mortgage and by spending your money elsewhere you can buy 1.55 times more goods now than your fathers could in 1987. Moreover, the graph looks like if BOE was consciously controlling for this measure over the past year trying not to let it go though the threshold of 1.6.

If so, it appears that the BOE is almost cornered and has very little scope to manipulate mortgage repayments any longer. If it lowers the rate, inflation shoots up; if it increases the rate, mortgage repayments are over the dreaded 1.6 level. They would need a miracle now.

Cheers

MortgageRepayments.doc

MortgageRepayments.doc

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Mortgage repayments inflation index is calculated by the Office for National Statistics and can be compared to the general inflation index (RPI excl. mortgage repayments) over the last 20 years. Both indices are normalised to 1 for Jan 1987. I took the ratio of the former to the latter to get the mortgage inflation relative to the overall inflation. This shows how expensive are the monthly mortgage repayments relative to all the other goods in the economy. It takes into account dynamics in mortgage rates and all the dynamics in average amount borrowed per household.

If we set this new index for relative mortgage costs to 1 for Jan 1987 we can see that for the last 20 years it shot higher than 1.6 only once – shortly before the last crash. Its current value is 1.55 (see Excel graph attached). This means that by foregoing your chance to have a mortgage and by spending your money elsewhere you can buy 1.55 times more goods now than your fathers could in 1987. Moreover, the graph looks like if BOE was consciously controlling for this measure over the past year trying not to let it go though the threshold of 1.6.

If so, it appears that the BOE is almost cornered and has very little scope to manipulate mortgage repayments any longer. If it lowers the rate, inflation shoots up; if it increases the rate, mortgage repayments are over the dreaded 1.6 level. They would need a miracle now.

Cheers

Nice graph. If I'm reading this right, the key difference I see to 1990 now is the proliferation of self cert. If the feel of this board is correct and significant corruption has been going on then we may be well over 1.6 already. Any views?

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Nice graph. If I'm reading this right, the key difference I see to 1990 now is the proliferation of self cert. If the feel of this board is correct and significant corruption has been going on then we may be well over 1.6 already. Any views?

But, the trend of increasing self-cert does not affect this graph, since self-cert is about income fraud, it cannot hide what the level of repayments is.

frugalista

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But, the trend of increasing self-cert does not affect this graph, since self-cert is about income fraud, it cannot hide what the level of repayments is.

frugalista

True,

what strikes me is the ease with which mortgage repayments shot up from the relative lows of 1.15 in 2002-2003 to 1.55 after just a relatively minor 1% point increase in base rate. This gives away the sensitivity and the total amount borrowed.

Edited by LazyDay

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True,

what strikes me is the ease with which mortgage repayments shot up from the relative lows of 1.15 in 2002-2003 to 1.55 after just a relatively minor 1% point increase in base rate. This gives away the sensitivity and the total amount borrowed.

One thing which might not be reflected in the graph is the trend towards taking out longer mortgages (e.g. 30, 35, 40 year instead of the normal 25) or interest only mortgages. These would reduce the repayments and thereby hide the fragility of the system.

frugalista

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the BoE is neither cornered nor scared.

central banks around the world are co-ordinated to a fair degree.

it might not seem like it sometimes but the whole exercise of money flow is geared around having this control.

one country wins,another loses,but taken as a whole the net gain is zero!!

..US/UK/AUS are about to be dealt a losing hand..

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One thing which might not be reflected in the graph is the trend towards taking out longer mortgages (e.g. 30, 35, 40 year instead of the normal 25) or interest only mortgages. These would reduce the repayments and thereby hide the fragility of the system.

frugalista

OR, more likely given my anecdotal experience, 30 and 40 somethings taking out new 25 year mortages (when they should be reducing or maintaining their prior mortgage tail) to afford their next move up the ladder. Sacrificing future income/retirement/pension on the altar of the mantra of ever increasing house prices...

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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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