In yesterday's Sunday Times (05/12/04) Roger Bootle (the wise one!) was quoted as saying interest rates in the UK could eventually fall to 3%. This got me thinking...

I'm the guy who wrote the The Crash is Coming but even I see a problem.

What if...
Labour wins in May 05 and Tony decides to have a Euro referendum in 06 and we join in late 06 or end 07. Our interest rate would be cut in half!!!

Or...

Gordon realises that his legacy is in tatters due to a house price crash (catchy isn't it?) so he decides, after all, to put us into the Euro by the same means.

In either case the great British public will vote for ECB interest rates.

Result - new housing boom!

Why would this not happen?

just need to look at Japan. MAssive housing crash but had zero interest rates.
If its overpriced it will come down to reality.
Apart from a suckers rally there is nothing that can stop the decline once it starts

So EC rates are going to stay low?
The EC is heading for serious economic and political problems, due to the new members putting one euro in and getting five euros back, won`t be popular with the British Electorate. The EC will become the biggest benefits system worldwide. Whose next who would like to join? The Ukraine.

Well that will get the populus saving like mad for their pension supplements, and make us a nation of great savers. Roll on I say

They may have low rates in Europe, but what are their mortgage rates? I bet they're not that much lower.

Simple. Who's going to buy all the property? With FTBs prices out of the market that just leaves investors to prop it up. Are we going to suddenly become a nation of renters when for so long the emphasis has been on home-ownership? No.
This interest rate argument seems almost redundant to me as irrespective of the rate, you still couldn't get a loan as an average FTB on a simple calculation of income multiples/affordability. The FTBs I know don't even consider the interest rate any more - they are just sitting tight waiting for a 'correction...'

Because, as everyone now realises, low interest rates do not work in our economy. Because our economy is basically buggered (very little wealth creation), consumer spending is financed (to a large extent) by debt. The powers that be (BOE) have finally realised this is not such a good idea as, sooner or later, there is nothing left to borrow against and people's perception of value becomes distorted i.e. you get high inflation.

Interest rates for French mortgages are not much different from here - despite their lower base rate. (French Mortgage Rates

Also to Martello, those look like UK rates to me, I believe they are.

Here in Sweden, where the base rate is 2%, the same as Euroland, the following rates are on offer from my local lender:

Basic variable rate 3.65% (but can be negotiated to 3.15% with more equity in your house)

3 month fixed 3.35%
1 year fixed 3.5%
2 year fixed 3.75%
3 year fixed 4.3%
5 year fixed 4.65%
8 year fixed 5.3%



Here is a copy & paste from their website, the dates show when the rate was last adjusted by the bank. Note that fixed rates have been coming down.

8 år 5,30 % -0,10 % 2004-11-29
5 år 4,65 % -0,10 % 2004-11-29
3 år 4,30 % -0,05 % 2004-11-29
2 år 3,75 % -0,05 % 2004-11-29
1 år 3,50 % -0,05 % 2004-11-29
3 månader 3,35 % +0,00 % 2004-12-01
Rörlig ränta 3,65 % -0,50 % 2004-04-06

To Financial Planner re the thread topic. I personally believe that UK citizens wouldn't vote to join the Euro in a referendum out of shere patriotism & nationalistic ideals.

But I also believe that the wider the difference between Euro rates and Sterling rates (assuming the Euro rate stays the lower of the two), the greater the chance of Mr & Mrs UK voting to join the Euro.

Ah the old low interest rate chestnut. Brilliant. Everybody I know comes up with this one

"No we won't have a crash because interest rates have to hit double figures"
"The BOE will just reduce rates and we won't have a crash"

It's very simple. Look.

Rates are not very far off their all-time low. And STILL people cannot afford to buy houses. The actual rate level doesn't matter, it's just affordability. When people can't afford houses, the price comes down. If it happens after a bubble, you always (historically) get a crash. If they did go lower I doubt it would affect the coming crash, the momentum has changed now - and it would only be a temporary repreive.

What is scary is that with rates not very far off their all-time low, you wonder what will happen when they return to a historical norm.

Ouch

AT LAST!!! Someone who echoes my own opinion about IRs.
It doesn't matter what the rate is when the house price itself is so out of reach.
Alleluyah...

I thought Gordon's 5 economic tests had not been met for us to join the Euro? And that the majority of UK citizens are against it?

Affordability is definitely the key however IRs will have some effect in what happens next. Higher interest rates will mean people have less disposable money, less to spend and therefore the economy will weaken and unemployment rise. This would in turn increase the number of properties coming onto the market in the form of repossessions etc at a time when there is more property for sale. I'd say that for a full scale house price crash of in the region of 40%+ we need the higher interest rates. They don't have to be double digit however, but if they doubled form the low of 3.5% to 7% that should have the same effect of what happened in the late 80's, rates doubling to around 15%. Even 6% would be enough to really hurt a lot of people, the greedy ones that borrowed too much.

Yes but my original point was what if we join 3% Euro rates? As to not passing Gordon's 5 tests -if he wants 'cos he's got no dosh left - he'll just change the tests.

I don't think interest rates going down will have much effect, I would say I'm a classic FTB and can't afford to borrow the amounts I need in terms of multiples of earnings, it's got nothing to do with IRs anymore. I'll buy when I can afford something other than a studio on 4 times earnings. In my area I need at least a 15% price drop for this and I'm earning above average. If I think prices are due to drop further however I'll happily wait - I'm only going to buy when it's clear the storm is over!

I can see what your're saying in terms of repossessions increasing supply and depressing prices but I don't agree that interest rates have to go up for house prices to fall 40%+ .... although higher IRs now will speed our journey there.

According to the historical earnings/house price trend, average prices are currently 35-40% overvalued. Also when prices crash, they generally crash 10% under this trend. Punters won't have confidence in buying houses again until they are relatively 'cheap'.

I don't think we're going in the EU any time soon. Certainly not soon enough to influence this crash. But let's say we did and IRs did get reduced to 3%... would that give me confidence as a buyer that house prices will now go up? Nope. Sure I can afford that house now but I think I'd rather wait and see if I can get a cheaper deal.

This is now how most buyers think and will continue to think until the earnings/price trend is restored.

I was checking rates in Sweden this morning & noticed that the fixed rates came down quite a bit since the above post last month.

Here are the current rates copied & pasted:

8 år 4,95 % -0,15 % 2004-12-15
5 år 4,30 % -0,15 % 2004-12-15
3 år 3,95 % -0,15 % 2004-12-15
2 år 3,45 % -0,15 % 2004-12-15
1 år 3,30 % -0,10 % 2004-12-15
3 månader 3,35 % +0,00 % 2005-01-01
Rörlig ränta 3,65 % -0,50 % 2004-04-06

In English:

8 year fixed 4.95%
5 year fixed 4.3%
3 year fixed 3.95%
2 year fixed 3.45%
1 year fixed 3.3%
3 month fixed 3.35%
Variable 3.65%

Compared with the 29th of November, the rates have come down a fair bit, signifying that the market expects Swedish rates (base rate 2%, same as the Euro rate) to stay low for a long time and possibly go lower soon.

A low interest rate does not making buying attractive in a falling market,
especially when it is cheaper to rent

That doesn't seem to be the case in Sweden.

To be blunt I don't give a rat's *** what happens to house prices in Sweden. It's the Uk that counts and they're coming down here!

So find yourself another thread to post on.

These rates are/were offered to dispel the myth that a lower base rate wasn't a direct lead onto lower personal rates.

I wonder what rates like these will do to the UK market in a couple of years?

AFFORDABILITY - why is it the consensus view on this forum that affordability is a problem?

My parents had a mortgage from 1981 - 2004 and always complained the mortgage was a strain. Nothing new.

Quite fitting for this thread.

Housing Bubbles Are Not Like Stock Bubbles


If you're looking for the housing bubble to end like the stock market bubble, you'll be surprised. Housing bubbles may run on the same fuel as stock market bubbles, excess money from the Fed, but they grow and collapse according to a different set of functions and dynamics.

http://www.alwayson-network.com/comments.php?id=6472_0_4_0_C

ericjanszen [Trident Capital] | POSTED: 12.29.04 @06:22
Here I respond to the cheerful voice of my favorite AlwaysOn blogger, Jamis, writing on one of my favorite topics, asset bubbles.

Before the Perkins's "The Internet Bubble" book was the site iTulip.com that explained in 1998 that the stock market had turned into a bubble around 1995 and predicted in March 2000 that it was about to burst. The reasons why were explained in a bankrate.com article, "What will pop the Internet bubble?" in Nov 1999.

The last update to Itulip.com was on the topic of the Housing Bubble, in August 2002. I deemed the housing market was indeed in a bubble. The main thesis was that rational housing prices are determined by cash flow, and cash flow is determined by incomes and interest rates. Incomes have been falling real terms (9.3% since 2000) while key real estate markets (read: where most people live), experienced housing prices rising between 100% and 400% faster than incomes. The explanation for rising housing prices was too low interest rates, which also caused the the stock market bubble of the 1990s.



The Fed wrote a recent piece on how housing isn't a bubble, reminiscent of Greenspan's now famous New Era rationalizations in 1999 for the stock market bubble. The Fed explains that housing prices are high because interest rates are keeping monthly payment costs low. In my view, that's not an explanation of rational pricing, only for the underlying cause of the bubble.

How does it end? On the way up, housing bubbles grow differently than stock bubbles. They're regional, because folks buy homes near where they get their income, usually withing a 40 minute drive. Now I realize that in N. CA that could be two miles away on the 101, but bear with me. That means prices fueled by too low interest rates will manifest where people and the jobs they drive, take a bus or train, or walk to are concentrated. Also, they happen in areas where land is scarce, such as waterfront property; speculation is encouraged by the reality of land limitations. A comment above says prices won't decline much in the future because land is limited relative to the number of people who want on it. Tell that the the Japanese who have seen real estate prices decline for more than 12 years. Too much land and not enough people in Japan? No. Even though interest rates have been near zero for years, the problem is that their incomes have been declining.
Low rates are the input of a housing bubble, areas of concentration of population or scarce land are where they happen, but low interest rates will not sustain the bubble forever. Just as housing bubbles are unlike stock bubbles on the way up, they're different on the way down, too.

Unlike stock market bubbles, real estate bubbles don't pop. Collapsing stock market bubbles are characterized by a sudden collapse in prices because stock markets are highly liquid. You see huge volumes of transactions at ever lower prices during a stock market collapse. Collapsing housing bubbles, on the other hand, are characterized by illiquidity, a sudden collapse in transactions. Buyers and sellers seem to disappear. The reason is a reversal in the psychology of buyers that developed at the top of a speculative housing market. Buyers had been buying at prices they knew were too high but on the assumption that they'd be able to sell if they needed to. The thought was: "Ok, maybe it's overpriced, but at least I'll be able to sell it later for at least what I paid for it, but likely more." What happens on the way down is that houses go on the market and just about NO ONE shows up to look. That's because buyers weren't buying earlier primarily because they needed a place to live, but because they thought the price would likely rise and that, in any case, they'd be able to get out when they wanted with all of their money or more. On the way down, neither condition is true. So buyers stay home, so to speak.
But can't buyers be enticed by declining prices, by bargain hunting, you ask? No. Once housing sale transactions suddenly fall from, say, several hundred a month in a large community to, say, one or two a month, this creates fear and loathing about prices. Long periods of time pass when there are no transactions at all. Think of it this way. What's the comparable on your 3000 square foot home in San Mateo when the last sale was, say, seven months ago? Is it 10% less than the last sale of a similar home on the area? 30% less? This happened in Japan, and prices nationally are still more than 60% below peak prices in 1992, where real estate prices continued to climb for several years after their stock market bubble popped. Sound familiar?

If you'd like to read more on this topic, Blanche Evans, the editor of real estate professionals' site RealtyTimes.com, has written a good series titled "The Perfect Real Estate Storm".

And click on the link for the iTulip.com housing bubble piece.

Have fun!

Ah, so it's a couple of years from now that you're focussing now is it?
No doubt because even a denialist can see what's in store in the nearer term.

Sure, if prices have crashed in the meantime and rates are then low there will probably be a recovery in a couple of years time. I'll probably be buying myself at that time. Big fat deposit**, prices 30% or more down from peak, low interest rates, yup, sounds good to me.

** largely built up by renting at 60% of current mortgage costs Nice of the landlord to give me free money don't you think?

Ah the Japan thing.......

Continually I remind people that the avg Tokyo HP in 1988 was $2 million USD ($3.5 mill in todays money for the avg house) & that despite falling however much they have (the article says 60%, others say 80%), they are still more expensive than London.

So I guess Japan really did have a RE bubble then......

Interesting selectivity re other countries. Sweden fits your views so bring that in. Japan doesn't so poo-poo it.
FWIW I think neither is massively relevant to what's happening in the Uk right now...

At least you're now acknowledging the key point, which is that when houses reach bubble valuations they then fall. We hit bubble valuations in summer 2004 in the UK, hence the inevitable correction. IRs are largely irrelevant. A bit lower and they may temper the falls a bit, higher and they may make them a bit bigger. But the bottom line is, house prices will fall simply because THEY ARE TOO HIGH!

Prices will fall , peices will fall, prices will fall.....

Keep saying it & you'll get what you asked for one day.

Housing market tanks, people will blame Tony & Gordon, and will look to kick them out at the earliest possible opportunity. They will be anti-govt, and will not ratify a euro referendum or anything else.

The British are so anti-EMU, I can't see us joining for at least 15 or 20 years.

Is it not possible, however, with a country so obssessed with property ownership, that a sales pitch along the lines of "We will halve your mortgage rates overnight", however untrue, will prove a vote-winner?

With 70% home pwnership & a very large portion of those people with mortgages, they'll vote yes to the Euro if there's enough cash in it for them.

Surely the Government cannot simultaneously offer a halving of interest rates AND state that our economy has converged with EU ?

Then again, I saw a poster on my way top work this morning:

"Lowest mortgage rates for 40 years - don't let the Tories take us back to 15% - vote Labour"

Now I am not exactly pro-Tory, but this poster really annoyed me. I think that the low IRs, which are now past their trough anyway, were more to do with "global terrorism" (i.e. terrorism that affects the US) than with Labour policy. Didn't they had over IRs to the BoE anyway ? This poster has made me consider my vote, so it has backfired in my case, for what it is worth.

Historically house prices fall about 4 years in every ten, which makes your both your ongoing bullishness and signature quote pretty laughable