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^ That chart is terrifying for somebody looking to buy a house at current prices.
Care to explain for the economically challenged? Just that interest rates are likely to shoot up at some point?
Care to explain for the economically challenged? Just that interest rates are likely to shoot up at some point?
Try any mortgage calculator at 15%... You'll see your monthly repayments multiplied several times over.
A couple earning 60k can borrow around £350k
On interest only mortgage:
At 1% interest per annum thats 3,500 interest or 300 per month (ish)
At 4% interest that's 14,000 per annum or £1200 per month (ish)
At 15% it's £42,500 per annum interest or £3800 per month (ish)
Capital repayments add about £1k per month to those figures.
So basically if interest rates go back to 4-5% the mortgage repayment doubles for that couple.
Just that interest rates are likely to shoot up at some point?
Currently its hard to image in scenario where that would happen. Lots has changed over the decades the circumstances which caused previous peaks (oil crisis, ERM, etc) are all one off events from the past which aren't going to repeat themselves. However, that's not to mean that some unforeseen new event won't trigger a new rise.
Also, interest rates are set by the BoE (with permission from Parliament), so they are effectively a political instrument as much as an economic one. If you find yourselves in a situation where a rise in interest rates would cause great damage, you can choose not to increase them, assuming the penalty for not doing so isn't worse.
So, the upshot is no one has a realistic scenario which would return interest rates to double digits; but that's not to say it's never going to happen. 15/20 years ago if someone predicted a time of consistently low interest rates at around 1% or less, they've have been called mad and yet here we are....
I’m not going to pretend to understand economics, but didn’t interest rates reach something like 15% in the 80s? House prices were much cheaper on paper, but the cost of buying was not – unless you had cash, of course.
We didn't have QE in th 80s. QE holds interest rates down, when there's a risk of them rising they turn the QE taps back on. They've made a conscious decision to inflate the property market and the rest of the economy so those with property feel richer, and those without very much poorer. I'd say there's almost no chance of them reversing this policy.
I’m not going to pretend to understand economics, but didn’t interest rates reach something like 15% in the 80s?
Not for very long, the main spike was a doomed attempt to keep the £ in the ERM at a stupidly high value, the market kept saying 'no way' and the chancellor kept putting up interest rates. He failed, the £ was ejected, interest rates came back down and George Soros walked away a billionaire (betting against a fool supporting an untenable position was a pretty easy win).
The proceeds should have all gone back into building new housing stock immediately, if done properly it could have been self sustaining, even with discounts
The councils were barred from doing this by the Tory govt.
There is capacity to build more (pre Covid effect on material availability) but house sellers will only release in phases to keep prices high despite having planning consent on a vast site.
The last house price crash was c92-94 that’s when a lot of people had negative equity and repossessions were rife. We bought in 94 and saw countless repossessed houses.
In the end we bought a 3 bed semi with garage, bigger than average garden for the site and conservatory for less than the price friends paid for a 2 bed terrace with no garage 5 years previously on the same site.
My first mortgage was at 17.5%,and had to wait four months for it. The house only cost 8k though.
“ Care to explain for the economically challenged? Just that interest rates are likely to shoot up at some point?”
I think the point is that they can’t go down any more really. I don’t understand why anyone who is remortgaging isn’t locking in as long a fixed rate as they can find. Yes it might be a few fractions of a percent higher than a variable rate but I’d rather know what I’m paying for 5 years right now than have a nightmare in 2 years when my low special offer rate runs out.
I’ve just got a decent 5 year fixed and I’m going to overpay when I can so I’m in a decent position when I have to change the deal again.
There’s going to be big problems if the rate rises even a couple of percent in the next couple of years as payments will increase a lot for some people who have stretched themselves and can no longer get the affordable deals on mortgages.
I guess some people see that they might be saving a few quid compared to a long term fixed and not really looking to the future too much (which to be fair is pretty scary for some and who knows what’s going to happen in world finances in the next few years!!?!?).
We didn’t have QE in th 80s. QE holds interest rates down, when there’s a risk of them rising they turn the QE taps back on.
in my opinion that's backwards.
Interest rates rise to slow the amount people are spending (and thus drop inflation) and drop to increase the amount people are spending (and thus increase inflation)
qe invents money to buy things that otherwise funds would buy. These funds then buy other stuff, pushing more money around the economy, and driving inflation.
increasing qe has the same effect as lowering interest rates. Its been done as you can't (without difficulty) drop interest rates below zero to stimulate the economy.
It is possible to use qe to slow the economy (instead of raising interest rates) but it'd be by reversing some of the QE deals already done (ie the treasury selling gilts that they bought and destroying the money), not by turning the taps on.
There was a good article on the FT on pandemics and interest rates.
Last June, the Federal Reserve Bank of San Francisco put out a paper on “The Longer Run Economic Consequences of Pandemics”. The authors studied the rates of return on assets in the wake of 19 significant pandemics stretching back to the 14th century.
As they say, “the results are staggering, and speak of the disproportionate effects on the labour force relative to land (and later capital) that pandemics have had throughout the centuries”.
Not good news for rich people, but “following a pandemic, the natural rate of interest declines for decades, reaching a nadir about 20 years later, with the natural rate about 150bp [1.5 percentage points] lower had the pandemic not taken place”.
That “natural rate” has also shown a secular decline over the centuries, from about 10 per cent in medieval times, to 5 per cent at the start of the industrial revolution in the west, to near 0 per cent today.
In other words, you will really earn nothing on your money now after correcting for inflation and speculative excess. And then some of the profitless pile that remains will be taken away.
Even though both wars and pandemics cut short huge numbers of lives, the SF Fed study says: “The effect of war goes the other way: wars tend to leave real interest rates elevated for 30-40 years, and in an economically and statistically significant way.”
When you think about it, this sustained pattern makes sense. Wars destroy property and disperse money, while pandemics kill people and leave structures intact, like neutron bombs. So plagues lead to fewer people relative to land and cash, which should lead to wages going up relative to rents and interest rates.
https://www.ft.com/content/7cbbcf95-da03-44d4-b63c-bb4c82b70add
There’s going to be big problems if the rate rises even a couple of percent...
This is what I don't understand. People keep saying it's not going to happen. And maybe it won't... But as a lay person just trying to make sense of it, my concern is that current low rates are the exception rather than the norm, and anybody taking out a mortgage to be repaid over the next 20 or 30 years, or more, is relying on those rates to hold for the entire duration. To the untrained eye, looking at charts like the one posted above, the probability of that happening seems incredibly low.
I'd love to know why that's not the case because I'd quite like to put my mind at ease.
There’s going to be big problems if the rate rises even a couple of percent…
This is what I don’t understand.
Neither do I. All mortgage applications for the best part of 10 years have been stress tested at 3% above current rates, so a 2% rise won't lead to a significant rise in mortgage defaults.
I’d love to know why that’s not the case because I’d quite like to put my mind at ease.
If you going to worry about something over the next 20-30 years, climate change would be a far more worthy subject!
But as a lay person just trying to make sense of it, my concern is that current low rates are the exception rather than the norm
Some people are saying they won't go up, but they are thinking of the 15% we had in the 80s. That's unlikely because that was a specific situation which won't really apply in the next few decades. Also, it's politically nearly impossible to raise rates that high since the fallout would be terrible and people remember what happened last time.
Also, now we are in the business of printing money to keep inflation low.
I'm trying to figure out if deflation is a risk for the UK in the next few decades.
Neither do I. All mortgage applications for the best part of 10 years have been stress tested at 3% above current rates, so a 2% rise won’t lead to a significant rise in mortgage defaults.
You say that but beyond the first application I did.... They did not seem to give two hoots about my current situation.
Just that I had a job and had not missed payments.
That is I've never had to send bank statements or payslips.
They would have no idea what my situation is.
So maybe your bank's more responsible than mine....but don't be fooled into thinking all are
So maybe your bank’s more responsible than mine….but don’t be fooled into thinking all are
Last time I applied was >20 years ago and paid mine off >10 years ago....
Ok so your applying what the media tells you to the real world and believing that's how it actually works.
molgrips
Full MemberAlso, now we are in the business of printing money to keep inflation low.
Eh, printing money drives inflation, it doesn't keep it low.
(according to traditional economics anyway. In reality we've been printing mountains of money since the last crash and the inflation that everyone says is inevitable still hasn't arrived)
But printing money just devalues the currency over the long term.
Was there not an African country or some Eastern blok country where people were paying for loafs of bread with carrier bags full of bank notes?
Imagine having a vending machine selling cans of coke, but the price is wired directly to the value of the currency in real time .. And you physically cannot put coins into it fast enough to ever pay for a can of coke.
Ok so your applying what the media tells you to the real world and believing that’s how it actually works.
To be fair those were exactly the hoops I had to jump through when we remortgaged. Did involve a change of banks though.
Was there not an African country or some Eastern blok country where people were paying for loafs of bread with carrier bags full of bank notes?
Weimar Republic (interwar Germany) or possibly Zimbabwe.
Also, now we are in the business of printing money to keep inflation low.
Eh, printing money drives inflation, it doesn’t keep it low.
Sorry typo, I mean printing money to keep rates low.
To be fair those were exactly the hoops I had to jump through when we remortgaged. Did involve a change of banks though.
Indeed but not all banks are equal was my.point.
There has always been a way to get a mortgage and I guess there will remain
Ok so your applying what the media tells you to the real world and believing that’s how it actually works.
No, I was reading the rules from the FCA website.
https://www.fca.org.uk/firms/interest-rate-stress-test
And just because your mortgage application didn't appear to follow them doesn't mean they aren't generally applied. Given that the FCA can revoke permission for a bank / BS to offer mortgages you would expect compliance to be good. I'm pretty sure banks etc are obliged to report salary multiple stats to the FCA.
And on a more general note, if you don't believe the media (at least the main stream sources) you're on a pathway to Q-Anon, Covid hoax etc. For all the faults in the UK, we have pretty decent media / news coverage (front pages of tabloids being the exception).
Well I guess time will tell.
As Danny pointed out the rate is a small part of the equation.
You might find it surprising that it's not just STW pondering such 'what ifs'. The BoE has a whole team of people collecting data and running models looking at such things. From which they adjust the lending rules etc to try to steer the economy away from any rocks. The great thing is, it's all released on their website every quarter.
https://www.bankofengland.co.uk/quarterly-bulletin/quarterly-bulletins
So you can see their modelling, assumptions etc.
Is it guaranteed to avoid a future recession, of course not, there are always unknown events which will occur and knock the economy off track; but most of the obvious ones are regularly wargamed.
E.g. they regularly stress test banks to see if they could cope with 15% unemployment, 10% mortgage default rate and interest rates at xx%; and those that fail the test have to hold more cash in their rainy day funds.
Sorry typo, I mean printing money to keep rates low.
That is incorrect too. We are printing money to avoid lowering rates any further
The BoE has a whole team of people collecting data and running models looking at such things. From which they adjust the lending rules etc to try to steer the economy away from any rocks.
Indeed, but they don't make the decisions, or are even listened to much on things that affect the economy, for example BoE was dubious about brexit and...they did it anyway, who needs experts?
In broad terms the biggest economic factor in any country is what the government does, loosing control of GDP would surely be the first indicator?
This is a very hot topic on here at the moment. It sounds like the OP wants to know if it’s better to buy now or wait and take advantage of a price crash. My friend is in the same boat and asked for my view. I’m not an analyst but work with a team who analyse property data. You can’t predict the future but you can make a judgement based on the data. So, whilst the stamp duty holiday partially caused higher prices, it was more likely to do with the pent-up demand from prior years once Boris was elected where we had more government stability than we did in the past – with small majorities / Brexit and the like. To illustrate this, the market bounce back was very strong (even before the chancellor put in place the stamp duty holiday) and actually Scotland’s demand is still high now, yet their tax holiday ended back in March.
Add the pandemic, which meant that people were not spending money – saving sums rapidly and therefore wanting to spend it. There is an underlying demand which is exceptionally strong. Demand is still outstripping supply. This only means one thing – increase in prices.
Next year will likely be more modest growth but there will be growth, unless its property in the £1.5m+ price range, which will start to fall and distort the overall figures.
We had a big uplift in million pound homes this year (as price rises tipped them over), so if you are buying under £1.5m, that’ll be me by some way, buy as soon as you can because prices will rise further, no?
I said this in other threads - we need 2 million new homes in the UK and the housebuilders are only doing 150k a year at the minute, or thereabouts.
Indeed, but they don’t make the decisions, or are even listened to much on things that affect the economy, for example BoE was dubious about brexit and…they did it anyway, who needs experts?
Well the BoE didn't do Brexit, the Government did. In terms of financial stability they do control who can lend how much to whom on what terms and they can rein banks in with cyclic stability buffers etc, so they have quite a few levers to pull. But, obviously is the government decides to declare war on China, for example, they don't have the necessary levers to insulate us from the knock on effects.
(according to traditional economics anyway. In reality we’ve been printing mountains of money since the last crash and the inflation that everyone says is inevitable still hasn’t arrived)
This is dead wrong, sorry. Sure - the flawed RPI/CPI measures of inflation aren't reflecting it - but look at asset prices, including the subject of this thread - property.
but look at asset prices, including the subject of this thread
This isn't an accident, it's policy. Successive governments (including labour) abandoned their traditional role of enabling an economy which provides well paid jobs in favour of an economy which provides cheap and highly available credit. The key to this is holding down interest rates no matter what. It nearly imploded in 2008 until they figured out they could sustain a low (consumer) inflation/low interest rate economy with QE. The trade off is massive inflation in assets (shares as well as property), which makes voters who already hold them richer, and anyone who doesn't much poorer. Like most bubbles it will burst eventually but not until they've done everything possible to sustain it. The real scandal of this policy is that the money printing benefits those who are already rich, rather than those who need it.