End of QE

Thrugelmir

Cleaver wrote: »

Thanks Thrugel, I pretty much thought that was the case.

However, if we pay that money back over the next decade or two via increased taxes and public spending cuts will this really be a catalyst for a sudden, large tumble in house prices over the next year or two? It just sounds more as though house prices won't be allowed to spiral up and up like they have over recent years if that scenario plays out.

Adding in the £300 billion that will need refinancing between 2011 - 2015 under the Special Liquidity Scheme. Once the brake levers start getting pulled the property market will slow down and possibly stagnate for a while. As like lemmings. Investors will desert property as they did Dot Com shares for the next fad once the returns are no longer there. Thats why BOE isn't unduly concerned at this moment. The BOE's priority is to allow the banks time to recover which in itself is going to take several years.

carolt

Cleaver wrote: »

Thanks Thrugel, I pretty much thought that was the case.

However, if we pay that money back over the next decade or two via increased taxes and public spending cuts will this really be a catalyst for a sudden, large tumble in house prices over the next year or two? It just sounds more as though house prices won't be allowed to spiral up and up like they have over recent years if that scenario plays out.

Not on its own...

As I understand it, QE has allowed interest rates to stay low, thus enabling people to continue paying the mortgage (indeed, even pay more off) despite the recession.

So surely the real question is whether ending QE will push up interest rates, and if so, how soon/much.

It doesn't take a genius to work out that house prices aren't sustainable at current levels if interest rates rise, without a return to v lax lending (unlikely) or big wage rises (also unlikely).

Cleaver

carolt wrote: »

Not on its own...

As I understand it, QE has allowed interest rates to stay low, thus enabling people to continue paying the mortgage (indeed, even pay more off) despite the recession.

At the risk of sound like Hamish (and god knows I don't want that), weren't all these people paying off their mortages fine and dandy when the base rate was +5% before this recession?

I'm a bit simplistic about this stuff. Before the recession, most people paid their mortgage off each month (a few didn't of course, but that's always the case). The recession came, interest rates were lowered as a result and people on trackers or SVRs paid less on their mortgage. Sensible people probably paid off extra each month, idiots bought TVs and stuff. QE ends, let's say for sake of argument that IRs go back to 5%, most people start paying per month what they were paying before hand. Where's the major problem?

I know that since the recession there are more people unemployed and others struggling a bit more than they were. But these are the minority aren't they? The majority will be paying what they paid pre-recession, and some of them will have paid a good chunk off in the meantime.

Cleaver

carolt wrote: »

It doesn't take a genius to work out that house prices aren't sustainable at current levels if interest rates rise

Why aren't they?

Generali

carolt wrote: »

Not on its own...

As I understand it, QE has allowed interest rates to stay low, thus enabling people to continue paying the mortgage (indeed, even pay more off) despite the recession.

So surely the real question is whether ending QE will push up interest rates, and if so, how soon/much.

It doesn't take a genius to work out that house prices aren't sustainable at current levels if interest rates rise, without a return to v lax lending (unlikely) or big wage rises (also unlikely).

Ending QE will most likely lead to big problems with 'crowding out'. That is the process where Government borrowing money means that money isn't available to be lent to the private sector.

Usually economists think of that as reducing investment and thus future GDP but given the massive scale of Government borrowing (not liabilities taken on but actual borrowing) it is pretty easy to see how that could end up restricting the money available to consumers for personal debt and for mortgages.

I'm yet to see anything to convince me that deflation has gone away as a serious risk. The debt crisis brewing in the Med could have implications for the UK too. QE won't be withdrawn any time soon IMO.

Radiantsoul

carolt wrote: »

Not on its own...

As I understand it, QE has allowed interest rates to stay low, thus enabling people to continue paying the mortgage (indeed, even pay more off) despite the recession.

So surely the real question is whether ending QE will push up interest rates, and if so, how soon/much.

It doesn't take a genius to work out that house prices aren't sustainable at current levels if interest rates rise, without a return to v lax lending (unlikely) or big wage rises (also unlikely).

QE didn't so much hold down interest rate(the cost of money) as increase the amount of money in the economy, although the effect was pretty similiar. I guess the problem was the government had done all it could do reduce interest rates(going down to zero would have made no real difference - this is a liquidity trap), but still people/financial institutions were choosing to hoard cash rather than invest or spent. By printing money and dumping it into the economy it raised the amount being spent or invested.

I don't see that the withdraw of QE will see interest rates borrowers face rising as the fear factor had declined and people are less willing to hoard cash.

Personally I don't think QE had anything much do to with house prices(certainly no one is claiming it is stated aim of QE) and nor do I believe that it is to allow the government to go on a mad spending spree. I believe that QE is monetary stimulus largely independent of the fiscal one.

Cleaver

Thrugelmir wrote: »

Adding in the £300 billion that will need refinancing between 2011 - 2015 under the Special Liquidity Scheme. Once the brake levers start getting pulled the property market will slow down and possibly stagnate for a while. As like lemmings. Investors will desert property as they did Dot Com shares for the next fad once the returns are no longer there. Thats why BOE isn't unduly concerned at this moment. The BOE's priority is to allow the banks time to recover which in itself is going to take several years.

Again, I understand all that and it makes sense. And fully agree that property may stagnate because of it and that investors will probably find a new fad for the next decade. I just can't get my head around why some think that stopping QE would cause prices to drop significantly over the short to medium term.

Radiantsoul

Generali wrote: »

I'm yet to see anything to convince me that deflation has gone away as a serious risk. The debt crisis brewing in the Med could have implications for the UK too. QE won't be withdrawn any time soon IMO.

I think it has lessen as governments and central bankers have realised it is a potential problem and they are prepared to do quite a lot to stop it. This was not the case in August 2008 when the BOE struggled to cut interest rates for fear of inflation.

carolt

Cleaver wrote: »

Why aren't they?

Well, if you're right and we go back to an environment where you have base rates at 5% and can get a long-term fixed rate at half a percentage point higher - as was the case a few years back - then no, house prices don't need to fall.

But I suspect that with less money swilling around, mortgage rates will be quite a lot higher, meaning that those who've been hanging on by the skin of their teeth during the recession due to job losses etc will fall off. Increasing supply. Whilst demand is reduced due to the fact that monthly mortgage payment are higher. So prices fall.

Cleaver

carolt wrote: »

Well, if you're right and we go back to an environment where you have base rates at 5% and can get a long-term fixed rate at half a percentage point higher - as was the case a few years back - then no, house prices don't need to fall.

But I suspect that with less money swilling around, mortgage rates will be quite a lot higher, meaning that those who've been hanging on by the skin of their teeth during the recession due to job losses etc will fall off. Increasing supply. Whilst demand is reduced due to the fact that monthly mortgage payment are higher. So prices fall.

I can't disagree with any of those 'ifs', You're right, if interest rates rise and if you can't get good five year deals and if there are significant people just coping now then I see how you could get carnage.

I guess I'd need to see more information about how many people are hanging on by the skin of their teeth. And I guess we'd need to see whether QE 'worked'. If the economy is coming out of recession and starts to grow it makes sense that unemployment falls and people earn more, thus affording their mortgage rises.

Look, I'm not advocating or stating that there will be major house rises over the next few years. I just don't see how there can be, and I don't get how house prices have risen over the last 12 months. But on the same hand I don't see any real big falls over the next one or two years. Time will tell I guess.

Interesting discussion folks, but I'm off to read my book as Mrs C is getting annoyed by my tippy tapping on the laptop.