Poll: A doubling of UK mortgage rates "cannot happen"
Are people betting their future ... on specious logic?
====================================

I found a remarkable posting in HPC, on a thread about UK interest rates.

First, here's the article that triggered the posting
1/
Home owners being restricted with loans based on future interest rates
The amount of money banks and building societies are willing to lend to home owners is being based on future interest rate rises for the first time, it can be disclosed..../

Despite an average two year fixed rate mortgage being 4.75 per cent, some high street lenders are basing their affordability calculations on almost double this amount.

Some lenders suggested that when deals run out, borrowers could end up paying a SVR of 8 per cent or higher.

The extra restrictions mean a family with a household annual income of £60,000 may only be able afford to borrow the equivalent of one year’s salary instead of a more traditional three times multiple.

Next, here's the post itself
2/
The doubling of mortgage rates will not happen, it would crash the entire financial system. Shouldn't the banks be more concerned about current borrowers? Can they afford interest rates at 9%?
You then have to consider the wider economic impact, rates at 9% would cause a collapse in aggregate demand leading to a massive collapse in GDP as consumer spending would stop.
This isn't going to happen.

I don't want to pick on the poster, so will leave his name out. But I do think his logic wants examining:

He is saying:

X cannot happen ... because it will "crash the entire financial system".

But In the past two years we have seen various financial systems crash, or nearly crash :

+ Iceland, which when "beyond financial collapse", into a cold world of stagflation, and starvation,
+ The Global economy, which nearly collapsed, but was propped up (temporarily?) by QE
+ Greece, where workers who are about to lose their jobs, or have their salaries cut, are out in
the streets protesting because they think their system is head towards collapse

Russia and the rest of the Soviet Union, went through its own financial collapse over a decade ago.

So it is foolish to think that governments can prevent a collapse, and that you can therefore bet that
they will take actions to effectively prevent it. It is more logical to look at history, and see that they
will take actions to delay problems, and those delays just make the problems worse when they
finally hit.

What worries me, is that there may be many people in the UK who are recklessly buying homes,
with the theory that interest rates will stay "around where they are now", and are not prepared if
rates should rise back to historical levels, let alone a doubling.

Here's a History of UK base rates


Mortgage Rates



I thought we should have a poll, and have also set up one on HPC.

Sterling is part of this story

I'm a pessimist, and I am expecting a currency crisis to hit the UK within the next year or so, which could eventually force UK mortgage rates up to 6-7% or higher.

And I also think that banks will require much larger deposits than at present. Maximum LTV could be 60-65%, or even lower.

The best case would be that this crisis is delayed, but delaying it does not make it less likely. Depending on how the delay is achieved, it may make the crisis more likely. The actions of the UK government over the lats 18 months have made this sort of crisis much more likely imho

If the poll were for US interest rates, it would be a lot easier. The rates there look to stay low for a long term as deflation sets in. It is not so simple for the UK though, where the UK might face a "hyper" deflation; assets deflate locally, but the local currency also deflates/ depreciates in the global capital market. It is this flow of capital out, and a weakened pound, which puts prices and interest rates on shaky ground. If they have to defend the currency, then rates go up.... ouch.

The Fukuyama view of history - that it has happened, and now all we have to look forward to is continual growth and prosperity. Whiggism dies hard.

imo this is also a cocooned view of the world, one that feeds on the desire for safety and security above freedom and dignity. As Aristotle said; "Men are not cattle to be farmed". We should've listened to Aristotle instead of our sophist economists. There are postive as well as negative aspects to an economic crash.

WHAT OTHERS THINK, #1:

Interest rates could stay low for 5 years, says Bootle

One of the UK's best known economists, Roger Bootle, predicts that interest rates will stay below 1% for the next five years.
His predictions will bring little cheer to thousands of British companies that import from the eurozone.
Brian Milligan reports.
/see: http://news.bbc.co.uk/2/hi/business/8444939.stm

The UK will face its currency crisis sooner than the US imho

Sterling / FXB ... update


The break below the important $1.55 level in the last 2 weeks is a very worrying sign.

I'm expecting the UK to do a Japan, for the foreseeable future. IR's will remain low, but borrowing will be virtually impossible for UK assets and nobody will want to anyway. House prices will thus fall (hopefully slowly, so toxic assets can slowly bubble away). Periodic QE and stimulus bouncing us in and out of growth. I cant see sterling falling dramatically, because every country is desperate to devalue; of course should the market decide to increase interest rates, there's little the government can do about it, but will they?

I'm no economist, but this seems the best outcome the UK can hope for!

Yes, if there was to be a crisis in the dollar, it would be years away. It's interesting that many currencies are rolling over here... suggesting that what happened in '08 was no anomaly. Looking at Aussie/ Dollar, for example, it looks like the deflationary contraction [to the central dollar] is re-asserting itself in other currencies also... albeit at a much slower pace than last time.... with the inexorable force of gravity.

Creditor,
I think you have aptly summed up the consensus view, and there is nothing wrong with doing that.
You may be right, along with many others.

The weakness in this argument is that the FX markets may become very hard on over-stretched sovereign borrowers.
The markets have already turned on Greece, and I think they will turn on other countries too. Unfortunately for the UK,
they are not very far along in the chain of dominoes.

So if the sovereign debt crisis spreads, as we saw the subprime crisis spread, the UK will find it hard to keep the current
complacency going.

Not the consensus view on the forums I go to. Most expect a massive increase in IR's with or without a currency crisis, or everything returns to growth and we keep low IR's.

If significant dominoes have fallen before the UK, It will encourage a carry trade that should help demand for the currency. Just guessing, as FX markets seem to me to be completely irrational.

Well, you are right in that about HPC, where so far (after 13 votes) none expect rates to stay below 5%.

Weirdly, they seem to be expecting a Tsunami, but no one on the beach expects to get wet.

A jump to just 6% would have a rather large impact on UK house prices imho

I think we first need to ask the question: Who sets interest rates?

If you believe it is the government/BOE then low rates will be here for years to come however if you believe it is the market (as I do) then there appears to be little hope of avoiding higher rates. The market will not continue to lend as sterling falls and default risks increase without demanding higher rates.

The only way I can see the market accepting low rates is if deflation kicks in harder and people flood into cash/bonds.
Either way the housing market is doomed.

A relevant question.
My view is the BofE can set short term rates, and the market (ultimately) sets long term rates.

But if Sterling crashes, then the BofE may find that it must accept an unhappy dilemma, and push up short rates too.

I could see this happening in the UK

Living Rent Free: Homeowners become Squatters

http://www.calculatedriskblog.com/2010/02/...culated%20Risk)

In Dollar terms,

Approx dates.

Peak USA $270,00 Dolllars in June 2006 down to low of $180,000 dollars in Sept 2009.

Peak Uk market in £ converted to Dollars.

Peak $384,000 Aug 2007 =(£192k(2.00/GBP)) To low of $201,00 in Jan 2009=(£150k($1.35/GBP))

So please tell me again which market has fallen most and fastest in Dollar terms ?

USA 33% Fall UK 47%




The sole aim of of the gang in power has been to keep house prices in sterling terms inflated. With only a reasonable drop in Sterling 150-170 range.

Now the worlds currency dealers are smelling blood, and the dramatic drop in gbp/usd after the banks Governor said more printy printy on the way,

at a time when CPI/RPI are rising strongly.

Is there now a real possibilty of those in power accepting the inevitable hpc, and a change in stance of protecting the pound?

Do you think they prepared to see 105 GBP/USD on their watch ? I ask this because I just get a feeling the balance of power may change, and the

lunatic maybe carted off to the asylum?

Shock interest rate rise anybody ?

Regards

ML.

I agree.

there are ~80k police in the UK and there is a limit to how many repossessions they can enforce.

posters in this thread seem to be posting abstract charts while not even mentioning this bleeding obvious physical constraint.

Probably the only worthwhile legacy of New Labour was their handing over control of interest rates to the B o E.

Thus, whereas politicians would be unlikely to impose a shock interest rate rise (unless absolutely forced on them by the markets) the B o E could well do so in a bid to outwit currency speculators and pre-empt being backed into a corner where they have no choice but to raise IRs.

Maybe another feeble rise in GDP (manipulated or otherwise) accompanied by continuing rises in inflation would be all that is needed to justify an interest rate rise.

Housing market wouldn't like it but, then again, it sounds like its already been factored in to new mortgages.

You could well be right.

I think Gordon Brown is the elephant in the room

if he does manage to win anther 5 yrs in power

which he has been tipped to do in the Times today then

I can see the £ being totally trashed ,interest rates being kept low

all in an attempt to sustain the housing market

the average house price will not fall in £ terms but against all other currencies it will be trashed

This luntic is capable of anything

Under 4% (2 votes [2.99%]) : 3.5 x 2 = 7.0
4-5%. ( 1 votes [01.49%]) : : 4.5 x 1 = 4.5 .. 11.5 /3
5-6% (16 votes [23.88%]) : : 5.5 x16 = 88.0 .. 99.5 /19
6-7% (23 votes [34.33%]) : : 6.5 x23 =149.5 .. 249.5/ 42
7-8% (13 votes [19.40%]) : : 7.5 x13 = 97.5 .. 347.0 / 55
8-9% ( 1 votes [01.49%]) : : 8.5 x 1 = 08.5 .. 355.5 / 56
9-10% (1 votes [01.49%]) :: 9.5 x 1 = 09.5 .. 365.0 / 57
Over 10% (5 votes [7.46%]) 10.5x5 = 52.5 . 417.5 / 62
====================

Therefore, the average guesss amongst 62 voters on HPC is : 6.73%

Such a rise by mid-2011 would be enough to seriously undermine houseprices IMHO

...on GEI...

Under 4% (1 votes [3.70%]) : 3.5 x 1 = 3.5
4-5%. ( 3 votes [11.11%]) : : 4.5 x 3 =13.5 .. 17.0 / 4
5-6% ( 4 votes [14.81%]) : : 5.5 x 4 =22.0 .. 39.0 / 8
6-7% ( 9 votes [34.33%]) : : 6.5 x 9 =58.5.. 97.5 / 17
7-8% ( 5 votes [18.52%]) : : 7.5 x 5 = 37.5 ..135.0 / 22
8-9% ( 1 votes [03.70%]) : : 8.5 x 1 = 08.5 ..143.5 / 23
9-10% (1 votes [03.70%]) :: 9.5 x 1 = 09.5 ..153.0 / 24
Over 10% (1 votes [3.70%]) 10.5x 1 = 10.5 . 163.5 / 25
====================

Therefore, the average guesss amongst 25 voters on GEI is : 6.54%

According to Febs inflation report the pressure to increase the BOE base rate subsided slightly compared to Nov. Without having the chart it goes up by about 0.5% per 6 months until reaching 4% at the start of 2014. It is based in part on the money market future expectations. Whilst I accept this is all a croc of sh*t its reasonable to assume it will be AT LEAST this.

OFAH

The Fed WOULD say that, hoping the market agrees.
But there is some truth to that, which is why I think the pressure will be on the UK first,
since inflation there remains "too high"

Thanks for the numbers.
But those in the UK get paid in pounds, and finance property (mostly) in Pounds.

Only a handful of international luxury buyers would keep score in USD

Agreed,

However imagine if the gbp drops to 105 or even 90cents to the dollar,1.20 to the Euro as some have predicted.

Then the same occurs GBP based assets are cheap 60% cheaper unit labour costs are cheap.

Looking futher into the future any amount of international companies looking to expand into European markets, or maintain there current operations now

or post the current situation, will look for a Uk base they will be attracted to GBP sites will have significantly devalued against all other European

Euro denomomated states, in terms of land, wage unit costs!!!


Also existing businesses will be bought up for market share, ie Kraft buying Cadbury.


Whilst Mr and Mrs Smith still live in their million GBP terrace,(which will have devalued 50% in world terms)

and earn 100k at the town hall,(which will have devalued 50% in world terms) population they will be kept happy .


World competiveness massively increased, nothing France or Germany can do about it, British export business into the Eu

would expand massively into Europe, imported goods would increase in cost, whilst home built goods would look cheap to home markets

with tourism up ?



No I have reconsidered my position of earlier in the day , Merv will print and print and print. GBP IS GOING DOWN THE PAN.

Interest rates are staying low debtors will be protected, debt will be deflated away.


The example in the previous post of deflating assets in a controlled way on the worldstage, whilst keeping calm in the country is just to

good of an example of them not to continue whilst trying to keep in power, telling Joe public they are doing well.



Regards

ML

Problem is:
+ Someone may pay 1,000,000 GBP for a their terrace home, but the Smiths cannot afford to buy their own home
with an income of 100k.
+ They can only afford to live there, because their mortgage is 250K or whatever, because they bought the home
years ago, when it was cheaper.

At some point, the cash-rich buyers willing to pay such a high price will get exhausted,

and/or rates will begin to tick up, then that big stretch between the prices, and what UK-income earning buyers
can actually afford will begin to weigh on prices, and they will head down towards more normal ratios to income,
whatever the pound is trading at.

If a falling pound fails to boost incomes substantially, and instead forces rates higher (to protect the currency),
property prices will come thundering down.

I think you may see this scenario play out within months rather than years

Agreed, many people who have bought their properties over ten years ago couldn't buy them now.

The market has become exhausted, that’s why new mortgages sales dropped 25% last month.

Now the government owns 84% RBS, and all of NR, do you think it will risk it's investments by putting rates up,

or leave the rates where they are, allowing the banks to make big margins 0.5%-----5% 0.5-----15% on credit cards?

The uk government has used it position of independence of euro control to devalue the pound and will continue to do so.

Rates aren't going up, they have said so even stating more printy printy, they have thrown 200bn at it so far why would

they shoot themselves in the foot by putting up rates.

The government does not care about anybody out of the market, anybody in cash, any savers, it just cares about keeping the

perceived price of UK property high in sterling terms, and the more it devalues sterling whilst doing this the better.

It is using this opportunity to make the UK a competitive base for European markets.

The euro is to big and to young to be governed by the Germans and French, by devaluing sterling against the euro the UK will be able to chase

their manufacturing market share.

If you could explain your thinking as to why rates will rise soon and dramatically I could perhaps then understand your position?



Regards

ML.

This sort of policy will fail in the long run, as has everything that arch-villain Gordon Brown has tried. The man has single-handedly destroy almost all the wealth in the country, by a long serious of economic policy blunders of historic proportions.

Why?
Because as Sterling slides, at some stage the UK will have to raise rates, and raise them alot, to protect the currency. This is inevitable if the UK persists on the reckless path that it has embarked upon.

You need to study what happened in Iceland, and in Argentina to see how this path progress in the long run.

The game will be over - probably sooner than you think.
The UK house of cards cannot be held aloft forever, since it become more fragile with every passing day

Have you checked to see what the pound is doing today ??

Hi Doc,

It is doing exactly what they intended it to do when the likely hood of more printy printy was announced by old merv last week.


If you could explain your thinking as to why rates will rise soon and dramatically I could perhaps then understand your position?

Please answer this question, as I really respect your opinions , what event will force them to raise rates?

I am here to learn and I can't see them being able too, or want too?

Regards

ML.

Far too many people (in the UK, if not on this website), are convinced that RATES CANNOT RISE,
and are willing to bet that way (by buying houses or stocks), and that "certainty" is dangerous

The Builders shares are telling me that there is weakness ahead in property prices.

The fall in Sterling could morph into something very ugly over the next 3-6months,
which may then force the BofE to raise rates. But they may be heavily pressured to keep them down
into a May election. That is not far away now

I'm not sure how the British would react if this took off in a big way there. I guess a lor of people would ask why are they continuing to pay their mortgage when their neighbour is not, yet their neighbour is still living in the house next door. For the record my view is that rates will start going up in the UK in the not too distant future, and they could go up sharply as well.

Yes like ours did today. 4% wow!

THIS clip is for those who think UK base rates cannot rise much from 0.50%,
because "the UK economy is still weak"...


Ukraine Bond Yields Rise Before ‘Tough’ Repayment Schedule

March 3 (Bloomberg) -- Ukraine paid the highest yield in six weeks to raise financing through three-year domestic bonds ahead of a jump in debt payments due in April.

The average yield at yesterday’s auction rose to 22.92 percent from 22.68 percent at the last sale of similar maturity securities a week ago, according to data on the Finance Ministry Web site. The government raised 150 million hryvnia ($18.8 million) of the 1.4 billion hryvnia offered. The yield was the highest since Jan. 19, when the rate reached 25.55 percent.

Investors are demanding higher returns after Ukraine’s economy shrank 15 percent last year, the most since 1994, prompting a $16.4 billion emergency loan from the International Monetary Fund. Political turmoil, from a legislative fight hindering approval of the 2010 budget to last month’s election that led to a court challenge, has kept the IMF program frozen since November. Ukraine must repay about 3.7 billion hryvnia in April, the most in any month since October when maturities rose to 4 billion hryvnia, data compiled by Bloomberg show.

/more: http://www.businessweek.com/news/2010-03-0...t-schedule.html

We're not there yet though. 30 year Gilt auction covered 1.92 times and with a short tail.
http://www.guardian.co.uk/business/2010/ma...overnment-bonds

Look what helped them !:

Today's bond sale was helped by credit markets rallying in the expectation of a €25bn EU bail out to help Greece reduce its debt burden, cutting the price investors pay to protect themselves against a potential sovereign default. These instruments – known as Credit Default Swaps (CDS) – fell as much as 308 basis points in the case of Greece, from 340 basis points, meaning that it takes €308,000 to insure €10m of Greek debt. Britain's CDS fell to 82bps, from 87bps, according to Markit data.

Greece also received unexpected support from singer Nana Mouskouri, a former a member of the European Parliament, who plans to donate her parliamentary pension to the Greek government to help cut the budget deficit. The singer, who rose to fame in the 1960s and 1970s with songs such as White Roses from Athens, told Greek newspaper Eleftherotypia she felt a "duty to the country" and is very worried by criticism of Greece over its budget crisis. "I do not want Greece to be treated like a cancer," she said.

More confidence in Greece favoured Britain and other high-deficit countries that have to pay higher interest to attract borrowers. Yields of 10-year UK bonds stand at about 4.20%, higher than Spain's 3.8% and Germany's 3.1% – but still below Greece's 6.25%.

Is MrBrown now relying on the generousity of Greek singers?

Thanks for the reply Doc.We both agree what needs to happen, just different time perspectives.

I think we are both singing from the same hymm sheet, it's just you have more faith in the next government!

It will probably take IMF intervention before a resolution is sought.

I don't think Davoid wants this one.

I see 12months of A WEAK hung parliment.

Agreed, but it is the current easy option, and modus operandi, of this weak government, and will continue to be as long as they can get away with it.

The only person to put this senario to Brown was a euro mp, who's name escapes me because he received no main media attention.

Browns reaction was that of a sick psychopathic smile.

When in a hole stop digging, these guys brought in heavy duty diggers when they introduced printy printy,they have no intention of allowing free market

economics to dictate a solution!

Ultra low rates are continuing.
That fact that property prices are rolling over in the midst of such low rates,
should bring real fear to the heart of any homeowner who considers what will happen as rate pusher

Hi to all,

My take on this for what its worth.

To predict the future look at the past. I think we are at the 1991/92 stage now. Interest rates had been cut(low for the 90's) and house prices had made an 8 month mini recovery. We know what happened next. Prices carried on dropping for the next 4 years and interest rates started to climb.

There was an election around the time which John Major won in a surprise victory, although the majority was small and they were able to achieve little.

We are right at this stage now, and it will be interesting to follow how it ties up with the 90's.

Ken Clarke states the obvious in the Evening Standard from a couple of days ago. But at last we have a mainstream politician who is prepared to speak the truth.



http://www.thisislondon.co.uk/standard/art...mic-disaster.do

thanks.
Do you have a graph for the 8 month recovery you refer to?