Wednesday, August 3, 2016

Enhanced affordability will increase prices

What will an interest rate cut mean for you?

Forget all the other issues, when rates fall, as I've said for a long time is just as likely as the now forgotten rise, banks will start to factor that in, increasing the amount that borrowers can afford when borrowing to buy a house or carry out mortgage equity release. This money will be used to bid up house prices. If house prices rise faster than construction costs, more homes will be built, but with a migration surge front-running border controls, they simply cannot build enough. Prices are about to go through the roof. Wider issue is, if rates fall, is this, following years of plateaux, the beginning of a downward trend towards negative? With oil prices back below the $40 handle this week deflation may be a wider trend due to technology & movement of labour via migration & IT.

Posted by libertas @ 05:14 PM (5433 views)
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24 thoughts on “Enhanced affordability will increase prices

  • britishblue says:

    In 2008 extraordinary measures were made across the world to stop the Western World collapsing. A cut in interest rates means to me that this financial crisis is far from over and everything so far has failed. The only option on the table is to become more Zimbabwean, cut interest rates further, more QE, more easy money schemes such as help to buy. This is happening at a time we have economic growth and very low employment. We all know that this has never been done in history before and none of us know the consequences. In history a 10 years period is a flash of an eye and in the last 10 years we have seen the wealth transfer from non asset holders to asset holders, a dramatic decline in home ownership and the only future for youngsters. who belong to non asset holding families is one of low job security and renting for the rest of their lives. If this monetary policy continues, the situation will only get worse.

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  • High prices have done nothing for building rates Libby – unfortunately

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  • Not sure about nothing. Skyscrapers up left right and centre in London and building is going a trot. Issue is, even todays high levels cannot compete with immigration, and whereas we are getting more high density inner London building, what people really want, which is family homes, simply are not being constructed as the construction market shifts towards the rental market and because it is very difficult to find greenfield sites planners will allow.

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  • Like, when was the last house and garden built in London? Its all flats, flats, flats.

    Literally, the only source of new houses in big cities now is conversions from converted flats to houses. That I see as the big trend, with renters moving from flat conversions to purpose built flats as houses become so valuable that everybody will be converting them back from flats to houses. But of course, this transition does not necessarily mean more homes!

    It comes back to Gordon Brown’s focus on brownfield sites, which itself was good, but there seemed to be a ban on anything else.

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  • A cut in interest rates means to me that this financial crisis is far from over and everything so far has failed.

    I remember the days when Flashman would aggressively argue that all was fine and dandy, and the financial crisis was a thing of the past. It’s amazing how someone *seemingly* intelligent can be so, so wrong – very annoying actually.

    I’ve always said, that there will be NO interest rates EVER, under the current monetary system. Simply too much debt.

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  • Affordability?? Apart from a few years in the ’80s mortgage rates were in the 8 – 10% range for most of the last 25 years or so of the 20th century. Now they have a bit more than halved. In the meantime house prices have, since the early 80’s, gone up by perhaps 8 or 9 times in London and 5 times in the rest of the country. So who’s laughing apart from lenders?

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  • So who’s laughing apart from lenders?

    The lenders aren’t laughing at all – not with low interest rates like that. Only the those with big property portfolios, and government are happy.

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  • Lower interest rates but much bigger loans with more cheaply acquired funds.

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  • hpwatcher…. I often wondered why Flashman could not see the big picture – he was focuses on neoclassical micro economics which discounted debt and land/monopoly in its models and thinking. Debt based on bank lending inflating land prices is now they key issue in our economy. We can now see we are in the Japan situation and will continue with low interest rates and government forced lending supporting land values stopping the banks going bust. and the poor will pay and pay as our real economy languishes.

    [IMG]http://housingjapan.com/wp-content/uploads/2011/11/japan-interest-rates.gif[/IMG]

    I am reminded of some Tolstoy quotes to describe Flashman:

    “Quite difficult matters can be explained even to a slow-witted man, if only he has not already adopted a wrong opinion about them; but the simplest things cannot be made clear even to a very intelligent man if he is firmly persuaded that he already knows, and knows indubitably, the truth of the matter under consideration.”

    “The only thing now that would pacify the people now is the introduction of the Land Value Taxation system of Henry George. The land is common to all; all have the same right to it. Solving the land question means the solving of all social questions…. Possession of land by people who do not use it is immoral — just like the possession of slaves.”

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  • Lower interest rates but much bigger loans with more cheaply acquired funds.

    Bigger loans made largely with FLS money.

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  • 9. pete green

    Hmm indeed. I think of confirmation bias – it simply suited his personal circumstances to take the position he did.

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  • #gloating

    I have been talking for the past 3yrs or so on this site that the plateaux on rates was a pause before dropping into negative, which may stick for decades due to various societal trends causing deflation on goods and services.

    So many of you took the p%£[email protected]£ out of me for going the opposite way to the crowd and the propaganda.

    Will some of you now admit that we are at the beginning of a massive housing bull market driven by cheap finance, uncontrolled immigration and a total failure to build what people want, i.e. proper houses with decent gardens?

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  • @10 – FLS – did you mean Help to Buy? How much house buying is supported by each?

    Anyway I’m thinking of property prices globally. Michael Hudson’s idea that banks loosen their credit terms to lend more and more against property, which is bid up on credit – part of the debt-leveraged economy, where a larger proportion of assets are represented by debt and more and more of people’s income and tax revenue is paid to creditors.

    @9 – do you mean judgeandury?

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  • @10 – FLS – did you mean Help to Buy? How much house buying is supported by each?

    No, I mean Funding for Lending Scheme, which has been pumping 15 billions each quarter, since Q2 2013 into UK mortgages. HTB is something quite different, but FLS is the biggie!

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  • Thanks for that. The BoE says FLS is geared mainly towards SMEs, so there must be a helluva lot going into them. Unless the BoE is slanting its info.

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  • @libby the figures speak for themselves – prices up thousands of percent since the end of WW2 but private sector building peaked at just over 200k in the late sixties and has been on a downward trend ever since, with minor upticks along the way. As a proportion of current stock, private sector building is even worse than it seems – the denominator effect

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  • Thanks for that. The BoE says FLS is geared mainly towards SMEs, so there must be a helluva lot going into them. Unless the BoE is slanting its info.

    SME’s was the ‘cover’ but it’s mostly gone into mortgages. Remember the big price increases we saw in 2013? Precisely the same time FLS kicked off.

    @ Libby – I have been talking for the past 3yrs or so on this site that the plateaux on rates was a pause before dropping into negative,
    I preferred your predictions of interest rate rises far more.

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  • britishblue says:

    Libertas @10..

    You may be right or you may be wrong. My view is that there is a tipping point on interest rates. At some point if most rates end up in negative territory then there is greater the chance of bank runs across the world. Then of course there is an option to ban cash and make everything electronic. ( not a society I would like to live in).

    Also your views about people renting in purpose built flats reminds me of Communism. If you went to Poland, Czech Republic 25 years ago, everyone lived in a block of flats. The only difference was that rents were fair, related to salary, if anything went wrong then repairs were done immediately, you were able to upgrade to more rooms if you had more childen and enough housing was built for everyone.In the West we despised this because people lacked opportunity.

    Finacialsims wheere less and less people own the assets and more and more people by default into the rentier economy for life is worse than Communism and bears no resemblance to traditional Capitalism.

    The wider picture is where is our society going rather than what some of us have made on property over the years? I am not a pessimist but I don’t think this is all going to end up well if we take the longer term picture, 10, 20, 30 years, etc.

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  • britishblue says:

    Sorry should have read Libertas @ 12.
    This article sums up very clearly where I sit.
    http://www.zerohedge.com/news/2016-08-04/what-happens-when-rampant-asset-inflation-ends
    I guess my view is that this will end and Libertas view is that it may go on forever. I don’t know of anyone that saw that this would last for eight years. So there are those of us who think we are one black swan away from imploding and other that think that with the Lehman experience and central bank collusion they can carry this on indefinitely. One side effect is increasingly discontent electorates across Europe and the USA.

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  • “Will some of you now admit that we are at the beginning of a massive housing bull market driven by cheap finance, uncontrolled immigration and a total failure to build what people want, i.e. proper houses with decent gardens?” This is how its been up to now.

    We’ve always been just a policy / incident away from a housing correction. The only difference is we’ve got additional vulnerabilities increasing the probability of a correction happening.

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  • bb @ 18 ‘The wider picture is where is our society going rather than what some of us have made on property over the years’ And you could ask just what have we made. Let’s say residential property in the UK is worth £5 trillion. How do we realise that £5 tn? It’s just a paper number. At the margin someone could sell in the SE and move to Hull or Burnley and realise a chunk of equity. But for the millions who think they own a worthwhile part of that £5 tn it’s just a huge bubble of fictitious values on a narrow base of real values (see my response to quiet guys’ article a few posts ago).

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  • Meanwhile back in the real non-financial world oop north all that super low interest rates and various funding schemes have achieved is to keep prices more or less where they were.

    London would probably implode from the commuter belt inwards if rates were to rise.

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  • @Hpwatcher
    @Pete Green

    “Flashman …”

    Flash/J&J isn’t here any more. It’s unedifying to attack him now, when he cannot reply. Time to move on.

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  • @21 good point. My home equity is pretty meaningless – it’s not enough to move to a house, and if my equity went down by £50k, the house would go down by £100k and I’d be quids in, with £50k more to spend on more worthwhile things that actually generate economic activity.

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