Base Rate To Increase Above 8% Before Homeowners Feel Heat

[dtl]

Hello,

I found this recent report from the Aliance and Leicester that suggests that baserates will have to increase above 8% before we have a situation similar to that experienced in the last housing crash!

http://www.yougov.com/archives/pdf/XPJ060101001_1.pdf

Not particulary good news.

Does anyone have any thoughts?

Thanks

[Bingley Bloke]

Hello,

I found this recent report from the Aliance and Leicester that suggests that baserates will have to increase above 8% before we have a situation similar to that experienced in the last housing crash!

http://www.yougov.com/archives/pdf/XPJ060101001_1.pdf

Not particulary good news.

Does anyone have any thoughts?

Thanks

Clearly they've underestimated the number of people with IO mortgages Most 'property bulls' I know are sailing perilously close to the wind and would be screwed by rates of 5.5%.

[dog]

Hello,

I found this recent report from the Aliance and Leicester that suggests that baserates will have to increase above 8% before we have a situation similar to that experienced in the last housing crash!

http://www.yougov.com/archives/pdf/XPJ060101001_1.pdf

Not particulary good news.

Does anyone have any thoughts?

Thanks

Interest rates have gone up by 1/4% and we are facing the possibility of 1 million bancrupcies. With the level of debt that people are in, I suspect that 8% interest rates would lead to fighting on the streets.

[HousePriceLottery]

Interest rates have gone up by 1/4% and we are facing the possibility of 1 million bancrupcies. With the level of debt that people are in, I suspect that 8% interest rates would lead to fighting on the streets.

Hear hear, this report is aimed at engendering complacency towards rising rates.

If it were true why the hell did we need to cut interest rates so desperately last August...!

[88Crash]

Hello,

I found this recent report from the Aliance and Leicester that suggests that baserates will have to increase above 8% before we have a situation similar to that experienced in the last housing crash!

http://www.yougov.com/archives/pdf/XPJ060101001_1.pdf

Not particulary good news.

Does anyone have any thoughts?

Thanks

I think this is 100% accurate, the the majority can handle 8%

However this majority haven't bought or sold in the last 5 years, hence they will also have f*ck all to do with HPC

They are on the sidelines

[2005]

I think this research does miss the point.

It isn't current householders with low mortgages that will bring on a crash - there are loads of those who could cope easily with an interest rise - it would only take them back to what they were paying a few years ago and wages have probably risen to cover that in that time.

An interest rate rise of the level they are talking about would stop people remortgaging( and moving), put an end to the straggling first time buyers still entering the market, end BTL, lower house prices and prompt some BTL who are counting on capital appreciation to start selling, and reduce confidence in the housing market as an investment.

This alone would, IMO, be enough to start a crash.

But if they feel the market can cope with a large interest rate rise...bring it on. Giving the BOE and Gordon evidence to suggest that the UK can raise interest rates without a problem will only help them justify an interst rate rise.

Excellent - yes, lets all support an rise in interest rate.

[Guest Guy_Montag]

I think this is 100% accurate, the the majority can handle 8%

However this majority haven't bought or sold in the last 5 years, hence they will also have f*ck all to do with HPC

They are on the sidelines

Damn, you got there first. I was going to say that.

[Rachman]

Interest rates have gone up by 1/4% and we are facing the possibility of 1 million bancrupcies. With the level of debt that people are in, I suspect that 8% interest rates would lead to fighting on the streets.

But what's taking these people under, their mortgages or the other crap they have out there ? And let's add in that making bankruptcy too easy has attracted a lot of people to ? Most of that debt is not at 8%, it's at unsecured rates above that and credit card rates anyway - that's what will take them down......

[OzzMosiz]

I think this is 100% accurate, the the majority can handle 8%

However this majority haven't bought or sold in the last 5 years, hence they will also have f*ck all to do with HPC

They are on the sidelines

Exactly! Most will be ok, but even 5 or 10% of home owners struggling to pay/repossessed will be enough

to alter sentiment.

[non-FTBer]

Its a sliding scale.

Some (many according to bankruptcy/IVA/repossession stats) are already being affected with rates at 4.5%.

If rates increase then every increase will catch more people in the IR trap.

What would be more interesting from them in terms of research would be estimates of how many more people would be affected seriously by each IR move upwards.

It would also be interesting to work out how much money each IR increase would have on debt repayment.

Assuming a £1trillion debt to pay, a 0.25% increase (ignoring fixed rates) would result in higher payments to the tune of £2.5billion a year.

That would be another £2.5billion not being spent in shops propping up the economy.

So even if people think they are not affected by small IR increases then they are in denial. Every IR move upwards robs the 'miracle' economy of more consumer spending to keep it afloat (as does rampant inflation in essential goods - fuel, energy, taxes, food etc).... and this will cause spiralling job losses.

[88Crash]

Damn, you got there first. I was going to say that.

[dog]

The other problem with 8% iterest rates is that is will stop people from shopping. Shopping has become one of the corner stones of the economy. If people stop shopping, layoffs in the retail sector will be dramatic.

[BillyShears]

Hear hear, this report is aimed at engendering complacency towards rising rates.

If it were true why the hell did we need to cut interest rates so desperately last August...!

The average UK household with a mortgage..

...

The total cost of debt servicing for households with a mortgage stands at 13.8% of income.

Some of the points I cover have already been mentioned, but I think it's informative to take a few numbers out of the report.

If we just look at recent first time buyers, rather than averaging out across the whole population including those who bought cheaper houses some time ago and/or have paid off large amounts of their mortgages, how does the picture look? How would a percent or two affect recent first time buyers. I'd predict that many would be in great trouble.

And remember that many people buying at current prices will be considerably stretched in terms of affordability. If interest rates go up, then they will be the ones hit hardest. How many recent FTBs pay 13.8% or less of their income as mortgage? Greater or less than the number who pay 50% or more of their income servicing their mortgage? Knowing that some people have much smaller mortgages and won't be in as much trouble as someone with a 5x IO mortgage doesn't exactly help the people with the 5x IO mortgage does it?

Remember also that people getting on the property ladder are mostly going to be taking on large loans, with much more than 13.8% of their income going to service the debt, and hence they will be far, far, more exposed to interest rate increases than average people with a mortgage. So what will even small rises in mortgage rates do to the already tiny number of FTBs entering the market?

Finally, did they say what a few percent on mortgage rates would do to the profitability of BTL? We had some worked examples recently showing that for highly leveraged BTL landlords, even tiny changes made big differences to the profitability of BTL.

Billy Shears

Edited May 24, 2006 by BillyShears

[Rain'ard]

I remember about three years ago on the Money Programme it was said 5.5% was enough to kill the market and BTL. And It wasn’t so bad then.

[sam]

Hello,

I found this recent report from the Aliance and Leicester that suggests that baserates will have to increase above 8% before we have a situation similar to that experienced in the last housing crash!

http://www.yougov.com/archives/pdf/XPJ060101001_1.pdf

Not particulary good news.

Does anyone have any thoughts?

Thanks

That should be a huge relief to the BOE then, i was under the impression they were in a no win scenario until i read this. Increase rates and the heavily indebted consumer goes under, do not increase them and inflation kicks in. Must be a relief knowing that they can now raise rates to say 6.25% without putting the mortgage holders under too much pressure

[zag2me]

I've got a tracker mortgage currently at 5.5% and can easily afford 8%, its not too far off.

What I couldnt afford would be loosing my job, Thats the only thing that would force me to sell.

Edited May 24, 2006 by zag2me

[BillyShears]

I've got a tracker mortgage currently at 5.5% and can easily afford 8%, its not too far off.

What I couldnt afford would be loosing my job, Thats the only thing that would force me to sell.

What salary multiple did you buy at? And how much of your mortgage have you repaid?

Billy Shears

[Levy process]

I doubt a lot people near the start of a mortgage would enjoy 8%, and I know a lot of people that would be ruined by that. But as a percentage of the whole population, maybe they make up a small part.

HOWEVER: If rates went up to 8%, the capital cost of houses would come down a lot, which would be great for a lot of people on here, who have captial to buy stuff with, rather than those that would take out mortgages to buy, which would see little gain in immediate terms from rising rates (capital cost falls, interest repayment rises to fill the gap, total cost, much the same INITIALLY).

[Pablo-silver or lead?]

If a VI Lender says interest rates need to go to 8% for it to work (If it isn't hurting it isn't working). That will only encourage BOE MPC to raise rates. I suspect that IR at 5.25 to 6% will do the trick but if fecless borrowers want them higher to curb their behaviour, let em have it.

Pablo Silver or Lead?

[onionpie]

Hello,

I found this recent report from the Aliance and Leicester that suggests that baserates will have to increase above 8% before we have a situation similar to that experienced in the last housing crash!

http://www.yougov.com/archives/pdf/XPJ060101001_1.pdf

Not particulary good news.

Does anyone have any thoughts?

Thanks

For a start the graph

"Debt servicing as a percentage of household income for households with a mortgage"

is misleading because it only states the cost of the interest burden. Because of current low interest rates the burden of repaying capital is relatively greater than in 1990.

[Jason]

It's been debunked before: http://www.housepricecrash.co.uk/forum/ind...topic=26090&hl=

The Guardian article on that release: http://business.guardian.co.uk/story/0,,1731636,00.html

Guardian:

Britain is not on the verge of a "debt meltdown" despite the fact that debt levels have trebled over the last 15 years, new research from Alliance & Leicester claims today. The report, dubbed the "borrowing thermometer", says interest rates would have to double from their present level of 4.5% to produce the same kinds of debt stress and negative equity as during the recession of the early 1990s.

My previous reply:

This doesn't make sense. It says "average mortgage interest payments totalled £4,542 over the year, about the same in money terms as 1990.", so mortgage interest payments are the same in money terms? I.e. adjusted for inflation (i.e. the proportion of your pay is roughly the same).

It then says "says interest rates would have to double from their present level of 4.5% to produce the same kinds of debt stress". So, payments are the same as the 90s, but interest rates would have to "nearly double", but the interest part of the mortage is the same in money terms?

Again, the report has contradictions.. it also ignores the capital repayment which is far far higher than the 90s in money terms.

Edited May 24, 2006 by Jason

[Time to raise the rents.]

Have to say I agree with you lot that the average person could afford 8%, but any recent buyers would be stuffed. Rents couldn't rise fast enough if we hit rates like that in a short time and there would definitely be a crash in that scenario.

Averages hey, who needs 'em?

[The Masked Tulip]

I had a letter from A&L this morning that they were reducing their IRs for saving accounts. Hang on, has the BOE reduced the base rate? I think not.

[keepwatching]

I think this is 100% accurate, the the majority can handle 8%

However this majority haven't bought or sold in the last 5 years, hence they will also have f*ck all to do with HPC

They are on the sidelines

Many of these will desperately wish they hadnt MEWed for that new car and holiday though.....

[Brian Potter]

This is clearly bo**ocks!

For simplicity the figures are rounded but:

If interest rates are currently 10% and they go up by 1% = roughly 10% on your bill

If interest rates 4% and go up by 1% = 25% rise in your bill

If you are maxed out at 10% you may manage, but if you are maxed at 4% you is fooked.