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Why Will Raising Interest Rates Cause A Crash

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Be gentle with me !! This is my first post and I don't profess to be an expert in economics (or excel).

I grabbed from the Nationwide site (link from the graph on the HPC home page) the average house prices from '1998. Did the same for BoE interest rates from the BoE site and put them on an excel graph. There doesn't appear to be any correlation between interest rate rises and a HPC. In the case of the last "correction" of the late eighties they went up together for about 18months starting in Q1 '88 thru til Q2 '89.

Perhaps I'm missing something here and I'm hoping you guys who have looked at this more than me can put me right.

My own guess is that it will take more than a couple of quarter point interest rate hikes to burst this one. Too many people have too much to lose this time and unless TB and GB can find some external scapegoat (preferably foreign with sand between their toes) I think they will prop it up at all costs.

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Deleted cos it was all crap.

Perhaps the association you were looking at is due to lag and speculators having already priced in a certain amount of IR rise, but not the 12-15% it reached?

Edited by DabHand

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So...it took an IR rise of 7% before the 5h1t hit the fan. If we take a not uncommon mortgage today of £100k on Interest Only that would mean finding an extra £600 per month or there abouts. Somehow I don't think todays' BTLs or recent young buyers are going to be able to take that. What sort of a hike do you think will be needed before it goes pear shaped?

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This is what I associate with a crash:

Falling affordability

At the moment we are seeing this in the form of rising living costs, record debt, rising unemployment and rising taxes. This comes at time when house prices (as a multiple of earnings) are higher than at any time over the past 1000 years.

Excess supply

We don't have excess supply today but we will do if sentiment turns sour. There are large numbers of under utilised properties (second homes, holiday lets, rented property with voids, empty houses, unsold new builds) that will flood the market if the owners feel that the bull market is burnt out.

Sentiment

Once a critical mass of the population believes that a house price crash is inevitable, it becomes a self fulfilling prophesy. Sentiment is turning sour with the steady stream of bancrupcies, reposessions and a relentless rise in unemployment.

Government spending is rising relentlessly and dragging taxes up with it. This is driving companies abroad in record numbers.

For goodness sake stay away from property market. The economy is going pear shaped (badly) and the property market has never been in a bigger mess.

(please note, I didn't mention interest rates once)

Edited by dog

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Be gentle with me !! This is my first post and I don't profess to be an expert in economics (or excel).

I grabbed from the Nationwide site (link from the graph on the HPC home page) the average house prices from '1998. Did the same for BoE interest rates from the BoE site and put them on an excel graph. There doesn't appear to be any correlation between interest rate rises and a HPC. In the case of the last "correction" of the late eighties they went up together for about 18months starting in Q1 '88 thru til Q2 '89.

Perhaps I'm missing something here and I'm hoping you guys who have looked at this more than me can put me right.

My own guess is that it will take more than a couple of quarter point interest rate hikes to burst this one. Too many people have too much to lose this time and unless TB and GB can find some external scapegoat (preferably foreign with sand between their toes) I think they will prop it up at all costs.

Large_Graph.jpg

You have missed out the effect of MIRAS interest relief. This could be applied to the first £30k of a mortgage back then. Prior to 1988 there was a dodge for married couples who could apply for £60k MIRAS relief. This reduced the monthly payments a fair bit. There was a mad rush of buyers during 1988 who didn't want to miss out on the interest relief deadline.

Do a google on MIRAS. (mortgage interest relief at source)

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In the 90's l think the lending criteria was nowhere near as lax as today:

You had endowments which still required a repaytment vehicle so wasnt really the IO we have today.

BTL's required a large % deposit and often had much higher IR's so there wasnt every tom dick and harry borrowing to the max to turn a buck.

There was no self cert in the 90's and a 3-4 times lending strucutre was more strictly adhered to.

Why was this? Because there wasnt such a supply of cheap overseas credit so the banks were more risk averse when lending. It meant that it would take a much larger rise in IRs to actually make people unable to meet repayments. Judging by that graph housebuyers would have been used to high and fluctuating IRs, so would never assume things would stay sub 5% when trying to buy a house. Plus the banks wouldnt let them if they had a income that would struggle with 7% plus IRs..unlike today.

What would precipitate a crash now given the massive general borrowing and lack of savings people people have today? About 1% max.

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Nice to see some facts presented on this site instead of spin.

Interest rates were 15% in 1990. Most people would consider this to be the primary reason for the crash.

People were paying around 60% of income on their mortgages.

Property suddenly didn't seem like a good investment.

Then there was the Sterling/ERM crisis in September 1992, interest rates at 10% were raised to 12% to defend Sterling (without success), and there was talk of 15% rates which didn't happen. (I'm writing this from memory, either your facts or my facts are wrong.)

I have read a report produced by Mervyn King, where he said that the fall in house prices could not be entirely explained by interest rate rises.

But your point is a very good one, that if you look at historic interest rates and house prices you will find little correlation.

Edited by BandWagon

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Be gentle with me !! This is my first post and I don't profess to be an expert in economics (or excel).

I grabbed from the Nationwide site (link from the graph on the HPC home page) the average house prices from '1998. Did the same for BoE interest rates from the BoE site and put them on an excel graph. There doesn't appear to be any correlation between interest rate rises and a HPC. In the case of the last "correction" of the late eighties they went up together for about 18months starting in Q1 '88 thru til Q2 '89.

Perhaps I'm missing something here and I'm hoping you guys who have looked at this more than me can put me right.

My own guess is that it will take more than a couple of quarter point interest rate hikes to burst this one. Too many people have too much to lose this time and unless TB and GB can find some external scapegoat (preferably foreign with sand between their toes) I think they will prop it up at all costs.

Large_Graph.jpg

you must be thick can't you work it out???????

look at other threads and maybe pick up a book on eceonomics or GYIF.

man the youth of today can' t be assed to look up and do their own research on such a simple question with an abundance of info out there.

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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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