No country for young men — UK generation gap widens

setmefree2

ukcarper wrote: »

Saying that between 1972 and 1992 interest rates were above 10% most of the time and easily averaged above 10%.

So true.
In the early 1970s, rates hovered in the 7-percent range and spiked up above 9 percent in late 1975, late 1976 and most of 1978. At the end of the decade and throughout the 1980s, mortgage interest rates rarely dipped lower than 10 percent.In the early 1980s, mortgage interest rates brushed the stratospheric highs of 18 percent and even 19 percent.
Imagine trying to get a home loan with an interest rate of 18 percent?


During the 1990s, mortgage interest rates ranged from around 7 percent to roughly 9 percent for many years. It was only in 2000 that rates began to fall to earth. They held at less than 9 percent in 2000, less than 8 percent in 2001 and less than 7 percent in 2003.

CLAPTON

Physics wrote: »

I'm saying that costs of borrowing heavily depend on inflation rates at the same time as interest rates. That's why I said to use real rates, rather than nominal ones.

The notion that real interest rates, not nominal ones, is important when assessing actual costs is not particularly controversial.

Here's a FT post that explains the concept fairly well (and as the comments point out: this is just rediscovering that real interest rates are the important factor).

Given that the 70s/80s had significantly higher inflation than today, it's not a fair assessment to look at interest rates then and now and claim cost of a longterm mortgage is unchanged.

well no,

what actually matters is the level of interest rates in relation to earnings and not cost inflation.

setmefree2

Physics wrote: »

I'm saying that costs of borrowing heavily depend on inflation rates at the same time as interest rates. That's why I said to use real rates, rather than nominal ones.

The notion that real interest rates, not nominal ones, is important when assessing actual costs is not particularly controversial.

Here's a FT post that explains the concept fairly well (and as the comments point out: this is just rediscovering that real interest rates are the important factor).

Why muddy the waters?

Over the 25 years of my mortgage my house cost me £398,362 - £250,000 in capital and £198,362 in interest. I don't really care whether that was a 1988 pound or 2013 pound - that's the money I had to earn to own my house in that 25 years.

Nothing controversial about that either.

Physics

Loughton_Monkey wrote: »

What if the above two scenarios are both true, but that house price inflation were to have been 5% and 6% respectively?

From a totally economic viewpoint, buying a house (on a mortgage) is merely a "leveraged investment". That is you 'invest' some of your own money, and borrow even more to buy even more of the same investment. Provided the growth value in the house exceeds the cost of servicing the loan, you're a winner.

Someone buying a couple of years ago on, say, a 4% mortgage should be swishing the Champagne with HPI of about 18%. Only the 'toasties' of this world whinge in their gripe water complaining of paying interest at twice the rate of inflation.

I don't think I'll ever be found arguing that taking out a huge, leveraged investment is anything but a winning strategy when that investment goes up.

Physics

setmefree2 wrote: »

I don't really care whether that was a 1988 pound or 2013 pound...

Fair enough! I'd certainly care, but I'd never insist anyone else should.

setmefree2

Physics wrote: »

Fair enough! I'd certainly care, but I'd never insist anyone else should.

Why are you arguing about the PPP of a pound? I still don't understand your point in regard to Baby Boomers?????

I'm merely saying you can't look at the purchase price of a property to establish its cost - you have to look at other things - particularly interest rates. Don't you agree with that?

Physics

setmefree2 wrote: »

Why are you arguing about the PPP of a pound? I still don't understand your point in regard to Baby Boomers?????

I'm merely saying you can't look at the purchase price of a property to establish its cost - you have to look at other things - particularly interest rates. Don't you agree with that?

If you mean real interest rates, I absolutely agree.

posh*spice

setmefree2 wrote: »

Why are you arguing about the PPP of a pound?

Because Haters Gonna Hate.....

setmefree2

Physics wrote: »

If you mean real interest rates, I absolutely agree.

Why? Do you think I earned my salary in "unreal" pounds?

Physics

setmefree2 wrote: »

Why? Do you think I earned my salary in "unreal" pounds?

Because the cost of loans depends on the rate of inflation.

Look, I'm going to quite the great Martin Lewis who kindly set up this board, and has a crack at explaining this concept with regards to student loans:

"For those who started university before 2012, there was no 'real' cost to borrowing money via student loans, as the interest rate was set at the rate of inflation (RPI). So borrow a shopping trolley worth of goods and you'll repay enough to buy the same, even though the actual cash amount may increase "

If you'd like to read more about real vs nominal interest rates, Wikipedia has a good explanation. But if you don't care, you don't care - and none of my answers to your questions will change that.