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Russian Roulette With The Economy

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The Telegraph article below trumpets the risks from the growing household debt (HD) ratio (HD/GDP); apparently HD now exceeds GDP. On the face of it, that isn't too alarming as noted in the article:

http://www.telegraph.co.uk/money/main.jhtm...3/ixportal.html

The worrying point here is to recall that ‘security’ for each mortgage is provided by the value of the house. Given that we all know UK houses are 2x over priced, based on gross income ratios, there seems to be a dangerous ‘non-linear’ effect lurking in the wind. How so? Well, a fall in house prices means a reduction in security and a reduction in security means an increase in mortgage rates, which in turn makes houses less affordable.

Others here ignore the perils to the UK and instead point to the US deficit and household debt, arguing that the US market is in a worse state and therefore moer likely to precipitate a global recession. I suspect this is not true, partly because taxes and government spending are so much lower here, but mainly because the US markets are so much more flexible – “have a labor shortage, no problemo senor, and no medicare required”.

To see if I am correct can someone post the following so that we can all see which country is in the deepest hole:

government debt

household debt

GDP

Per capita figures are the only ones that count since in this case size is not everything.

I would guess the UK is in deep doodoo, and have started to wonder if HMG are playing Russian Roulette with the economy. You also need to wonder if the Bank of England are complicit and about to pull the interest rate trigger.

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I cant decide if I am in a lose-lose scenario or win-win scenmario with interest rates.

Rates go down...my cash deposit for the house gains less interest but I can get a cheaper mortgage.

Rates go up...my savings will grow faster and house prices will be threatened.

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I cant decide if I am in a lose-lose scenario or win-win scenmario with interest rates.

Rates go down...my cash deposit for the house gains less interest but I can get a cheaper mortgage.

Rates go up...my savings will grow faster and house prices will be threatened.

I have been pondering this quandary myself of late.

I am earning in dollars, but my savings are currently about 2/3rds in pounds, 1/3rd in dollars.

Given that US rates are rising, and I eventually want to have pounds rather than dollars, one could argue that I am in a win-win.

If UK rates go up, then my UK savings pay a better return, and I should get the house price crash which would help me buy. If UK rates go down, then the pound will depreciate against the dollar, meaning I am earning more pounds. I will still get the house price crash, but it may be delayed a bit. However, when it comes, I may be able to get a cheaper mortgage.

Six of one and half a dozen of the other?

frugalista

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  • 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%



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