Jump to content
House Price Crash Forum
Sign in to follow this  
karhu

Are Low Interest Rates Really Working?

Recommended Posts

I’m starting to get the feeling that interest rates are not having their desired affect and this is causing a serious dilemma for the Bank of England.

Low interest rates obviously directly help businesses, but they should also enable consumers to spend more. However, the modern preoccupation with speculation may be negating this latter effect. The figures out today suggest that lending for mortgages in increasing but that the debt associated with ‘unsecured’ personal borrowing is decreasing. This is not what the Bank of England wants. How can this be?

House prices are so high that people are panicking, buying at ridiculous prices and effectively spending all their disposable income on servicing their mortgage. Thus the effect of low interest rates is now simply to fuel the housing bubble. It is not being used to fuel consumerism and generate economic activity. This is having the effect of reducing demand in shops and causing price deflation. Any further reduction in interest rates will therefore only serve to produce a larger housing price bubble and produce relatively little effect on GDP.

It has been suggested that a fall in house prices alone will be catastrophic for the economy. I don’t concur with this. The credit bubble has now reached a peak and run its useful course. The price of equities needs to come back down to Earth in order to stimulate consumer activity.

The traditional relationship between interest rates and consumer activity has broken down because they’ve been kept at a below neutral value for too long. Interest rates now need to rise in order to restore the equilibrium, which will also have the effect of deflating the house price bubble. Keeping interest rates low will result in larger asset bubbles that add no real economic value and we will eventually have monetary deflation. The Bank of England need to get off the fence.

Any comments?

Share this post


Link to post
Share on other sites

Aint that the trut'!

When the rates lower - as well as those who buy and spend all their money on mortgages there are those like me...

Even though I'm not buying now, high house prices make me save more and consume less for fear that the status quo may continue.

Share this post


Link to post
Share on other sites

I actually don't think they know what they want. Or at least they do, but it is no longer within the realms of any maths in this dimension.

They need growth in consumer spending, but the number of people that are going bankrupt means that there is demonstratably little space for growth in that direction since we have hit the point of overlending.

They want greater responsibility in the unsecured lending industry, but they can't do this without pissing off the paymasters and further constricting the already decreasing market (sensible people have got to the point where they won't borrow money in stupid ways)

The want to stabilise house prices without causing a crash since they have realised that the bottleneck is at the bottom of the bottle not the top, but they are competing with bankrupcy and increasing unemployment (and outsourcing to Asia) and they can't do this through interest rate rises without tightening consumer spending capacity further than it is tightened already by inherent limits in borrowing based on income (even with the level of elasticity in the formula for credit cards).

They're stuffed and shelved!

Share this post


Link to post
Share on other sites

I’m starting to get the feeling that interest rates are not having their desired affect and this is causing a serious dilemma for the Bank of England.

Low interest rates obviously directly help businesses, but they should also enable consumers to spend more. However, the modern preoccupation with speculation may be negating this latter effect. The figures out today suggest that lending for mortgages in increasing but that the debt associated with ‘unsecured’ personal borrowing is decreasing. This is not what the Bank of England wants. How can this be?

House prices are so high that people are panicking, buying at ridiculous prices and effectively spending all their disposable income on servicing their mortgage. Thus the effect of low interest rates is now simply to fuel the housing bubble. It is not being used to fuel consumerism and generate economic activity. This is having the effect of reducing demand in shops and causing price deflation. Any further reduction in interest rates will therefore only serve to produce a larger housing price bubble and produce relatively little effect on GDP.

It has been suggested that a fall in house prices alone will be catastrophic for the economy. I don’t concur with this. The credit bubble has now reached a peak and run its useful course. The price of equities needs to come back down to Earth in order to stimulate consumer activity.

The traditional relationship between interest rates and consumer activity has broken down because they’ve been kept at a below neutral value for too long. Interest rates now need to rise in order to restore the equilibrium, which will also have the effect of deflating the house price bubble. Keeping interest rates low will result in larger asset bubbles that add no real economic value and we will eventually have monetary deflation. The Bank of England need to get off the fence.

Any comments?

yup more secured lending and less unsecured.......smacks of robbing peter to pay paul.

....folks are remortgaging to clear their unsecured loans.....and probably spending a bit more than they ought to....these guys have no idea of risk!!!!,I doubt they've figured that when they default on the re-mortgage the bank takes your house.....at least on unsecured debt the bailiffs just take all the tat you've accumulated.

Share this post


Link to post
Share on other sites
Guest Guy_Montag

How about drop interest & business rates (to aid business) while increasing personal tax (the worst possible combiniation for me). That would allow business to reduce costs, while at the same time keeping a cap on consumer spending (which is all going on cheap Chinese goods anyway).

Alternatively drop tax & increase interest rates just to make me happy.

btw. My bank finally decided the last rate drop was for good & cut the interest rate they were paying.

Share this post


Link to post
Share on other sites

At least the FED seem to be listening to me. I believe that interest rates will rise, irrespective of inflation due to the above. How long will it take the MPC to realise that you can only keep interest rates below equilibrium for a short time before they have a detrimental effect on your economy.

It would be useful to have some more comment on this because it forms the core of the HPC hypothesis IMO.

Forget about the monthly report from Hometrack/Nationwide. That's just a distraction.

Edited by karhu

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 301 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%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.