QE a "monumental" mistake

Harry_Boyle

MacMickster wrote: »

Surely high house prices have tied up huge amounts of capital in fixed illiquid assets, thus stalling the engine of the UK economy.

Isn't most of the money tied up in houses a result of HPI and is therefore 'created out of this air'. Most people will have seen their homes rise in value, but will have done nothing to create that wealth other than to live in their homes. The wealth was not accumulated from savings and so they have not had to 'tie up' any money - it wasn't their money in the first place. Had HPI not occurred then they would not have had that money.

The real issue with high house prices is that people who bought during and after the boom have larger mortgages and need to spend a larger proportion of their income on servicing this debt. However, with interest rates so low, then this negates the problem and houses are more affordable than ever, especially when compared with renting.

MacMickster

Harry_Boyle wrote: »

Isn't most of the money tied up in houses a result of HPI and is therefore 'created out of this air'. Most people will have seen their homes rise in value, but will have done nothing to create that wealth other than to live in their homes. The wealth was not accumulated from savings and so they have not had to 'tie up' any money - it wasn't their money in the first place. Had HPI not occurred then they would not have had that money.

The real issue with high house prices is that people who bought during and after the boom have larger mortgages and need to spend a larger proportion of their income on servicing this debt. However, with interest rates so low, then this negates the problem and houses are more affordable than ever, especially when compared with renting.

Try to imagine Mr and Mrs Average.

Mr Average works full time earning £25K, or about £1600 per month nett.
Mrs Average works part-time earning £15K – about £1000 per month nett.

They have just bought a house for £200K with a £160K mortgage and £40K deposit, paying £900 in monthly repayments from their £2600 income, and will continue for the next 25 years.

Had they been able to buy the house for £150K with a £110K mortgage then their mortgage payments would be almost £300 per month less. This is money which would be available to them for discretionary spending throughout that period.

Harry_Boyle

MacMickster wrote: »

Try to imagine Mr and Mrs Average.

Mr Average works full time earning £25K, or about £1600 per month nett.
Mrs Average works part-time earning £15K – about £1000 per month nett.

They have just bought a house for £200K with a £160K mortgage and £40K deposit, paying £900 in monthly repayments from their £2600 income, and will continue for the next 25 years.

Had they been able to buy the house for £150K with a £110K mortgage then their mortgage payments would be almost £300 per month less. This is money which would be available to them for discretionary spending throughout that period.

I understand that, but my point was that with low interest rates their mortgage repayments are quite low so money isn't being 'taken out of the economy' right now as per the original discussion.

You pay the mortgage off one month at a time, not all in one go. Affordability is therefore judged on how much your accomodation takes out of your monthly income - not lifetime income.

Your point about taking money out of the economy during the current recession only holds if someone is buying with cash, which is not likely for most people.

MacMickster

Harry_Boyle wrote: »

I understand that, but my point was that with low interest rates their mortgage repayments are quite low so money isn't being 'taken out of the economy' right now as per the original discussion.

You pay the mortgage off one month at a time, not all in one go. Affordability is therefore judged on how much your accomodation takes out of your monthly income - not lifetime income.

No matter how high or low interest rates are currently or in the future, people will still be paying significantly more for a £160K mortgage than they would for a £110K mortgage, leaving them with less for discretionary spending.

Harry_Boyle

MacMickster wrote: »

No matter how high or low interest rates are currently or in the future, people will still be paying significantly more for a £160K mortgage than they would for a £110K mortgage, leaving them with less for discretionary spending.

Yes (an extra £208 per month at 5% interest rates), but that wasn't your original point.

MacMickster

Harry_Boyle wrote: »

Yes (an extra £208 per month at 5% interest rates), but that wasn't your original point.

An extra £208 per month in interest, PLUS a proportion each month of the additional £50K capital - and yes, that was my original point.

Harry_Boyle

MacMickster wrote: »

An extra £208 per month in interest, PLUS a proportion each month of the additional £50K capital - and yes, that was my original point.

But if we didn't have HPI then we also wouldn't have had rates at 0.5%. You'd have mortgage rates around 8% as they were prior to the housing boom.

A £150k house at 8% would cost £1000 pm in interest payments.

A £200k house at 4% would cost £666.67 pm in interest payments.

MacMickster

Harry_Boyle wrote: »

But if we didn't have HPI then we also wouldn't have had rates at 0.5%. You'd have mortgage rates around 8% as they were prior to the housing boom.

A £150k house at 8% would cost £1000 pm in interest payments.

A £200k house at 4% would cost £666.67 pm in interest payments.

I'm sorry but HPI isn't responsible for the current record low interest rates (although they are helping to support the current high house prices).

It is looking more likely that a loss of confidence in the pound will cause interest rates to rise significantly much sooner than many would have predicted a month or two ago. Again the cause is nothing to do with house prices, but the prop to house prices will then be removed.

Harry_Boyle

MacMickster wrote: »

I'm sorry but HPI isn't responsible for the current record low interest rates (although they are helping to support the current high house prices).

I thought the cause for the credit crunch was the global housing bubble, where mortgage securities were erroneously given AAA rating by credit agencies? If that's not the case, then what did cause the current financial crisis?

Graham_Devon

Harry_Boyle wrote: »

I thought the cause for the credit crunch was the global housing bubble, where mortgage securities were erroneously given AAA rating by credit agencies? If that's not the case, then what did cause the current financial crisis?

Hi Reno.

How's you?