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apom

Conversation With A Bull

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We all know that low inflation is going to make long term borrowing more expensive then high interest rates.. and hell it looks like those are on their way anyway.. It waiting for the morrons to realise.. Mr 9 times salary interest only mortgage doesn't seem to realise it yet..

I suppose if he had he wouldn't have taken out the mortgage in the first place.. anyway I had a conversation....

"So debt has never been cheaper... :) Smiles the bull..

Turinng around I said

"Actually its never been more expensive, if your talking long term debt.... Say like a mortgage.."

"Interest rated this low, are you mad..?" The bull sneared..

"Inflation is low to, you have to pay attention to all the details... Who told you that debt was cheaper?"

"My mortgage provider, who told you... " The bull really was entering smug overload..

"Mervin King the governer of the bank of England and the head of the MPC..." I had turned at this point and allowed a grin to cross may face..

"How come I hadn't heard that?" Bull....

"I don't know, he hasn't been that subtle about it.. Practically shouting it for years.. He did say that most wouldn't realise it for a while.."

I pause...

"but that when they did, house prices would crash.."

Not the exact words.. but just as effective..

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We all know that low inflation is going to make long term borrowing more expensive then high interest rates

Could you please explain this, as I certainly dont know and I suspect many other don't know either.

I owned property when rates were 18% and before you say they were not 18% they were to me it was a bank mortgage.

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Could you please explain this, as I certainly dont know and I suspect many other don't know either.

I owned property when rates were 18% and before you say they were not 18% they were to me it was a bank mortgage.

Okay, 18% ouch... that has to hurt more then most financial what nots..

but here is the thing, the ladder...

Mr FTB buys a house and the mortgage is a killer..

but things are okay as inflation errodes the debt, even without promotion his salary can be expected to grow and in a few years the mortgage payments are taking a smaller chunk of the old salary.. and there is equity in the house they have bought, they earn more and they can now afford more.. so they move up the ladder..

Now the house that they are selling will sell for more then they bought it for, but the same inflation that has increased their salary has moved up the FTB's earning power to meet the new price...

the ladder moves.

Without inflation this ladder is broken for a debt that hurts now will hurt for a much greater period of time....

We have low inflation so the ladder is broken.

with cheap borrowing hitting at the same point as the low inflation what you might end up with would be specualtion and massive inflation in the housing market before the effect of the low inflation cripples the ladder..

Low inflation, make that debt linger longer..

The banks make far more money if the value of the repayments don't drop then they can with higher interest rates..

Just imagine what would happen now if interest rates went up to...?

ouch..

does this all make sense?

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Could you please explain this, as I certainly dont know and I suspect many other don't know either.

I owned property when rates were 18% and before you say they were not 18% they were to me it was a bank mortgage.

Its the real interest rate that is key. With higher interest rates and higher inflation the real debt is eroded faster. Although much higher payments are nade in the short term.

Is that clear? Probably not.

The original quote assumes high interest rate means high inflation too. Though likely, its not necessarily the case.

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Ok thanks for that it is clear but I would not be laurejon if I didnt have a few questions to counter this. :D

Low inflation? Is inflation low today...........House prices are going up although more modestly at 5%pa.

Wages are going up, dependent on whom you work for, and it is becoming two tier but they are going up.

What if.........Real Inflation continues unabated?. Real Inflation that doesnt get reported in Gordon Shopping Bag, I didnt buy a Laptop this month but I did buy bucket loads of petrol, and burn a lot of Gas to heat my house.

One more thing.

I had a property in 1995 that I bought on the cheap to let out. I paid 55K for it, and it cost me something like 500pcm.

Now 11 years later that property is on the market at 225K, and I could finance it for £843pcm.

I earnt around 18k then, and earn 55K now.

So I am finding your summary somewhat difficult to support.

But thanks for explaining it, I do understand what the general jist of it all is but I think it is wrong.

I think we will have a bust, it would be unheard of for stagnation then a takeoff again. The market is going to get a shock, the worlds money men will never be happy with a measly 4.5% return on their money. This cheap money is the carrot, many have taken it and it wont be long before the stick arrives!!!. Hopefully next year.

Edited by laurejon

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Mervin King said that when people realised that inflation was not paying of their mortgages prices would crash.

You earn more now then you did back then..

but the average wage is dropping in the country.. (ouch)..

If wage inflation goes past 2.5% then Interest rates will rise to counter. That has been promised.

the average person does not get promoted past their early thirties, which is the average age now for a FTB..

Inflation has always shrunk debt faster then repayment..

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Inflation has always shrunk debt except during the last recession.

Inflation was runnaway with anything other than house prices.

House price inflation was negative, very negative, but the old shopping basket took a hit month on month.

And of course interest rates were surreal.

I am sure that basic world economics has not been rewritten by a bunch of pot smoking hippies called the Labour Party or rather New Labour the only distinction between the two is that the previous incumbants thought Pot was something you emptied for your master.

On a more serious note if we included everything that an average family has to shell out for each month to stay alive and get themselves off to work then inflation has been running at maybe 8% since labour took office.

The wages thing, well it is changing fast. We have seen a redistribution of wealth in the UK, some may argue it is more fairly distributed than before. I would think in my mind it is now unfairly distributed to those that do nothing to perpetuate the rises in their living standards and can only look to the taxpayer for additional renumeration. Whereas in the past, an individual would increase their wealth by additional work or by growing their business thus employing more people. A more socially responsible method of wealth distribution in my mind.

Edited by laurejon

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In long term debt you can expect that your repayments will shrink, my parents have a large house, but toward the end their repayments seemd so small..

when they had started the repayments it seems an awful lot..

It was the same amount of money... this is inflation.

the MPC are geared to stop inflation distabalising the pound... this inflation is wage push inflation...

This is what Mervin King meant..

Look back to the last housing booms pre 1989's crash.. there was no drop in prices, but the massive house price inflation created a massive wage increase demand.. this led to recession.

This is why the conservatives stopped the wage push inflation in 1989 and Gordon Brown and Mervin King have sworn that they will do the same.

Whatever makes the average property affordable this time it will not be an increase in the avearage salary..

Edited by apom

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APOM I appreciate you labouring the point.

But your views are based on the belief in the "Miracle Economy".

That is an economy that can use public services as the bridge to redistribute wealth from Central Government and into the wider economy. It is also based on the belief that a Government can hold back the tides of time.

Monetary Cycles are not gone, they exist and they have done since time in memorial.

We skipped the last downturn simply by lowering interest rates and creating a false economy driven by debt creation flooding the economy with borrowed money.

That remains the case today, we are borrowing, putting the money into the economy and we all get to keep our jobs. But it is not forever, it is unsustainable, there comes a time whereby what we have borrowed has to be paid back.

And that time is very very soon, and as a result the money being borrowed to fuel the false economy dries up. That means no Jobs, and no Jobs means reduced revenue for the Government, also those out of work have to be catered for, so even more tax for the few who keep their jobs, whilst paying off the national debt and indeed their own debts.

As we sprialled up on the debt driven economy, the fall is far greater and with a much bigger impact.

Lets all sit down and be serious here.

Can anyone even begin to explain how the debt incurred by the Government and the Citizens ever be paid off. Is there a repayment plan that I do not know of?. Some kind of magic formula. Are we going to announce that the UK is floating on Oil shortly, or that vast reserves of Gold have been found in the Welsh Hills.

Because if we dont have either of those then there is only a single road we can head down. And that road is the very same road we have taken each and every time a Labour Party have taken the reigns of the UK.

Miracle Economy is something we wanted to happen and like many fantasies many started to believe it.

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Apom - I think this is quite an important question, but not an easy one to get a handle on.

One approach I’ve tried is to take some interest rate, let’s say R, then suppose that both wage growth and mortgages rates are fixed at R, and work out the repayment schedule for a constant repayment 25 year mortgage at some income multiple M. This gives the repayment to earnings ratio for each year of the 25 year term, and allows the total fraction F of future earnings consumed by the repayments (area under the curves) to be worked out.

For M = 3.5, at a low rate R = 5% gives F = 14.7% and a high R = 10% gives F = 15.4%; more extreme borrowing M = 4.5 gives R = 5%, F = 18.9% and R = 10%, F = 19.8%. Obviously these are quick spreadsheet calculations, compounded annually, so might not be perfect, but they appear to show that in this scenario the total fraction of earnings consumed by the repayments over the life of the mortgage is roughly independent of the rate. Adding a 1% offset to push the mortgage rate above earnings growth raises the fraction F slightly but does not otherwise alter its lack of sensitivity to R.

The conclusion appears to be that the total mortgage burden, defined as the total fraction of the future earnings stream consumed by the repayments, is almost constant wrto variations in the rate. :unsure:

The killer argument is to include the inverse relation between prices and interest rates at constant affordability, i.e. that the earnings multiple will be higher when interest rates are lower. In this calculation we can set the repayment to earnings ratio at (say) 25%, slight affordability stretch, and work out the income multiple needed. Results are R = 5%, M = 3.5, F = 14.7% and R = 10% M = 2.27, F = 10% (this impllies house prices are 54% higher at R=5% compared with R=10%) and hence the current low R = 5% rate environment actually "costs" borrowers almost 50% more of their total earnings when compared to the previous high R = 10% rate periods :o

[low interest rate/ wage growth = broken housing ladder]

Edited by spline

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  • 341 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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