Question - Will Low Or Zero Interest Rates Cancel The Hpc?

[volvos60]

A thought occured to me this morning - The US have reduced interest rates to virtually zero, here in the UK we are not far away from that & may also get close to zero. Therefore the cost of servicing a mortgage is getting very low, so there will be hardly any forced sellers, even those made redundant who would, in any case, be bailed out by the government for 2 years if need be. If there are no forced sellers is the HPC cancelled?

If the banks stated lending again - a big if, because apart from anything else, the return for the banks will be so low that they might not bother lending anyway. However, if they do, there might even be a scramble for mortages from those in work wanting to trade up causing house prices to increase.

Unemployment is the big issue now, but even if it hit 10%, that still leaves 90% in work, many of whom aspire to trading up - will there ever be a better time to do that?

Genuine free thinking debate required?

Edited December 17, 2008 by volvos60

[interestrateripoff]

Won't make a blind bit of difference.

The people cannot borrow at 0% but the banks can.

The people no longer earn enough to borrow high multiples and wages are not going up.

The people no longer want more personal debt as they can't afford it.

It's game over it's just that the idiots in charge still think they can get their Ponzi economy working again by getting people to take on more and more debt.

If you want people to have more debt they need to pay higher wages.

Next tick box we move to is printing money. Again this will fail as it won't end up in the populations hands but the riches.

[expatowner]

A thought occured to me this morning - The US have reduced interest rates to virtually zero, here in the UK we are not far away from that & may also get close to zero. Therefore the cost of servicing a mortgage is getting very low, so there will be hardly any forced sellers, even those made redundant who would, in any case, be bailed out by the government for 2 years if need be. If there are no forced sellers is the HPC cancelled?

If the banks stated lending again - a big if, because apart from anything else, the return for the banks will be so low that they might not bother lending anyway. However, if they do, there might even be a scramble for mortages from those in work wanting to trade up causing house prices to increase.

Unemployment is the big issue now, but even if it hit 10%, that still leaves 90% in work, many of whom aspire to trading up - will there ever be a better time to do that?

Genuine free thinking debate required?

Good points. This may indeed kick start a bit of a scramble.

I guess a lot depends as well on Obamas first 2 or 3 months on what signals he sends out to the markets.

[since the beginning]

Interest Rates cuts will have a big effect for some current House (Debt) owners. This group can be split into type of mortgage i.e. will this actually reduce their repayments or not and whether they keep their jobs. Those that see massive falls on the repayments presumably will have more money to spend in the economy. However this will be cancelled out by those losing their jobs.

As for new entrants into the market, debt is debt and Banks won't want to lend beyond sensible limits for a long while. This alone will cause prices to reach sensible levels hence crash still on.

[repetitive bleats]

A thought occured to me this morning - The US have reduced interest rates to virtually zero, here in the UK we are not far away from that & may also get close to zero. Therefore the cost of servicing a mortgage is getting very low, so there will be hardly any forced sellers, even those made redundant who would, in any case, be bailed out by the government for 2 years if need be. If there are no forced sellers is the HPC cancelled?

If the banks stated lending again - a big if, because apart from anything else, the return for the banks will be so low that they might not bother lending anyway. However, if they do, there might even be a scramble for mortages from those in work wanting to trade up causing house prices to increase.

Unemployment is the big issue now, but even if it hit 10%, that still leaves 90% in work, many of whom aspire to trading up - will there ever be a better time to do that?

Genuine free thinking debate required?

ask Japanese uncle if it stopped houses from crashing to up to 80% off peak in Japan. and they didn't have the levels of unemployment that we did. plus they had savings and were a net exporter. its still on as far as i'm concerned

[expatowner]

Again this will fail as it won't end up in the populations hands but the riches.

How do you come to that conclusion?

[UncleKev]

What about retired people living off the interest on their savings? Zero percent interest would mean they have to survive on zero income.

[volvos60]

What about retired people living off the interest on their savings? Zero percent interest would mean they have to survive on zero income.

Retired people do not usually have mortgages - henced would not be forced sellers anyway, unless of course they had to release some equity

[interestrateripoff]

How do you come to that conclusion?

Has money ever ended up in the peoples hands?

Printing only works if you give people pay rises, over the past several years the BoE has been printing at over 10%. Have you had a 10% pay rise YoY for the past several years?

Have the vast army of public workers had these sort of pay rises? Didn't think so.

[tegan]

Forced to lend at rates way below the risk level, in the middle of a recession when unemployment is soaring, banks will simply not lend.

This is as obvious as night follows day, which makes it very confusing to me that this is supposedly designed to combat deflation, when it actually makes deflation worse. More likely the zero interest rate policy is all about robbing savers to bail out the reckless.

[5lab]

if rates were cut to 0-0.25% in the uk, my mortgage would officially be on -0.27 - -0.03%.

Has anyone had the bank pay their mortgage off before? All I need is to be able to fix it and I'm happy

on a more serious note, if you look historically, us rates appear to be more volatile than ours - that is with higher highs and lower lows. I don't think that low rates would cancel the hpc, but I think it would slow it considerably (maybe to ~-5% pa adjusted), which would probably be good for the economy. Apart from those who want the hpc to be fast so they can buy cheaper, sooner, I can't think of a reason why a slow crash, which avoids as much neg equity (as people will pay off their debt as the asset drops) wouldn't be better for the uk

[Leonard Hatred]

I thought the problem in the US was "interest rates 0.25%, mortgage rates c.5.4%"? I don't see why it would be different if the MPC tried it.

[Nationalist]

Retired people do not usually have mortgages - henced would not be forced sellers anyway, unless of course they had to release some equity

But if they've got no income they'll starve to death and then their houses will be sold for a pittance by their callous relatives....

Every cloud has a silver lining, y'know!

[gilf]

I thought the problem in the US was "interest rates 0.25%, mortgage rates c.5.4%"? I don't see why it would be different if the MPC tried it.

That's the main problem, current official BOE rate is 2%, if I could borrow and fix for 10 years at that level I might well buy today. You can't borrow at that level the bank rates are 5%+, only people getting benefit are people on trackers.

[ma-ku]

Interest Rates cuts will have a big effect for some current House (Debt) owners. This group can be split into type of mortgage i.e. will this actually reduce their repayments or not and whether they keep their jobs. Those that see massive falls on the repayments presumably will have more money to spend in the economy.

I am not sure they will spend any money saved on lower repayments. Surely, the events of this year will have reinforced the idea of saving for a rainy day. Job security has rapidly become the number one worry for most people I know.

[lets get it right]

Unless we go the whole hog and the government simply prints money and gives it to people - banks still need people's savings before they can lend.

So, the question is, what will people do with their money when they get 2% from the bank and inflation is (say) 4%?

I think we'll see the emergence of alternative banks - Zopa - being there already, of course.

I think we'll see more Zopas - banks that only lend to businesses - at rates that allow them to attract savers.

Ahh - I hear you say - but why would anyone borrow from Zopa at 6% when they can borrow from a High Street bank at 3%?

The simple answer is that, over a period of time, people will withdraw their savings from banks that pay low interest rates and move it to banks that pay higher interest rates. When we start to see adverts on the telly for Zopa ... that moment will have arrived.

The problem with Zopa, as far as I can see, is that it is too small at the moment and does not offer liquidity to savers, you have to commit your money for a defined period. If they get big enough to be able to allow people to deposit and withdraw at will - then a large chunk of the nation's savings will go into them.

The high street banks will end up providing banking services - but they won't have the money to lend to make a profit on to pay for it ... so, high street banks will have to charge for their current account services - and maybe get used to the idea they aren't banks any more, but just a service provider.

[kevla22]

A thought occured to me this morning - The US have reduced interest rates to virtually zero, here in the UK we are not far away from that & may also get close to zero. Therefore the cost of servicing a mortgage is getting very low, so there will be hardly any forced sellers, even those made redundant who would, in any case, be bailed out by the government for 2 years if need be. If there are no forced sellers is the HPC cancelled?

If the banks stated lending again - a big if, because apart from anything else, the return for the banks will be so low that they might not bother lending anyway. However, if they do, there might even be a scramble for mortages from those in work wanting to trade up causing house prices to increase.

Unemployment is the big issue now, but even if it hit 10%, that still leaves 90% in work, many of whom aspire to trading up - will there ever be a better time to do that?

Genuine free thinking debate required?

I would guess that the housing crash is still on, my hope is that the drop in rates is to de-value the ass of the pound which should lead to businesses moving their operations back to the UK, I think the result of all this may well be countries becoming more self sufficient with less global trade (protectionism really i suppose)

If the government is merely trying to re-inflate the economy through another debt cycle then it could well be game over, will be interesting to see what happens in the new year.

My crystal ball says the banks will continue to lend but mainly to small / medium businesses and mortgagees with faultless credit rating's, currently it seems as though banks will not lend large amounts (in the millions) at all and perhaps this will continue, the recent fraud scandal will only dent confidence further.

I still think riskier borrowers with small deposits will be funded but rates will be much higher to account for the increased risk, in effect I think the sub-prime will stay afloat but will be 2/3 times more expensive becoming the bank cash cow once again but no doubt this will take some time.

Major advances in just about all areas of life are currently being overlooked, there are many booms to come so my view is hang tight, ride the wave and finish up basking in the sun.

Edited December 17, 2008 by kevla22

[Sinking Feeling]

Even when rates went to zero in Japan, interest rates offered to the public were much higher than they often were in the West. Banks make money through their margins. The problem is that they will be left with no money to lend as those with savings move their money elsewhere.

[Selling up]

Banks won't lend at zero though.

Why would they, when they can get the same return at no risk of default just by sitting on the money?

Banks will lend at a rate that they think justifies the (high) risks currently involved in lending.

[volvos60]

Even when rates went to zero in Japan, interest rates offered to the public were much higher than they often were in the West. Banks make money through their margins. The problem is that they will be left with no money to lend as those with savings move their money elsewhere.

And if you want to stay liquid (i.e. in cash) where will you put your savings if not in a bank, albeit one paying the best interest rates you can get?. Foreign currency is a problem because not only are you buying at a low point, but you also have commission to pay on each transaction. Physical gold is not so liquid &, at the risk of starting a new debate which I don't intend to, when gold reaches it's highs just who, in a recessionary/deflationary environment will buy it off you?

[Agentimmo]

I've a very good friend in the UK who has a tracker mortgage who now finds himself several hundreds of pounds better off due to the rate cuts. But the problem for the Govt is that even guys like my friend are not spending this extra cash. It's being SAVED as he thinks theres an even chance he'll be unemployed in 2009-10.

The money is not being circulated in the economy. That's a big problem for the govt.

[Uriah Heap]

0% interest rates in the US? That is a very low number. Off the top of my head I can't think of a lower one.

[interestrateripoff]

0% interest rates in the US? That is a very low number. Off the top of my head I can't think of a lower one.

-1% is lower.

[Jay24]

I may be wrong here as I've only every bought 2 houses, but.........

Say you have a 25% deposit on a 100K house

25K cash

75K mortgage

The bank only values the house at 80K so will only lend you 60K this leaves a short fall of 15K.

Now would anyone in a falling market stump up the extra 15K or return to the vendor and ask for a reduction, I know what I would do.

As the banks are being over cautious surely they are going to be a major driving force of the HPC, it doesnt matter if they lend you 60% or 95% if they think its only worth 80K its only worth 80K?

This is more of a question than a statement

[Tummybanana]

But if they've got no income they'll starve to death and then their houses will be sold for a pittance by their callous relatives....

Every cloud has a silver lining, y'know!

Or, y'know, they could start actually using the capital rather than the interest to live on. Newsflash for Granny - you're 80; that rainy day you were saving for? It's here!