BOE MPC - Interest Rates remain at 0.5%

mwpt

padington wrote: »

We've seen them go down, so they can sometimes but yes again often businesses don't pass on cost savings when they don't have to which is the point I'm making. The difference being there are hundreds of mortgage providers for those that can afford a mortgage but for those that can't afford a mortgage there are none. In this case landlords don't pass on cost savings to renters and only pass on rises.

"Pass on"?

You'd think the people bidding for the house would have some say in it.

padington

mwpt wrote: »

"Pass on"?

You'd think the people bidding for the house would have some say in it.

In London when you rent a house you don't bid for it. You look around for the cheapest place near your job and take the least worst of a !!!!!! bunch.

chucknorris

padington wrote: »

In London when you rent a house you don't bid for it. You look around for the cheapest place near your job and take the least worst of a !!!!!! bunch.

I certainly don't see my rental properties in the way that you describe them, I lived in them myself for about 15 years.

westernpromise

Generali wrote: »

That implies an base rate of 4-8% with rates occasionally dropping as low as 2.5% for brief periods:

http://www.bankofengland.co.uk/statistics/Documents/rates/baserate.pdf

FWIW, I agree. I think base rates will return to long term norms. I don't see any reason for them to be at the 10%+ rates seen in the 1970s as we've gotten better at monetary policy. I think it is highly likely that rates are going to get back to long term norms though.

Indeed, the key question being how long this takes.

At the moment, the BoE strikes me as being in something of a cleft stick in terms of its objectives. It has the MPC to set interest rates, which are still ostensibly tied to the "inflation target" principle of nearly 20 years ago, which in turn was the successor to / clone of what used to be called the Ken and Eddie show of the 1990s - the original exercise in targeting inflation 18 months ahead.

Given the absence of any significant overall inflation for about 25 years the BoE objective has been modified to include a more nebulous one around financial stability - with which, unfortunately, the inflation once can be said to conflict. If you drop rates to 0.5% because there’s no inflation, the cheapness of money rapidly gets factored into asset prices, so houses get expensive to buy while the debt gets cheap. If inflation then returns, your latitude to raise rates to contain it is now constrained by your financial stability objective, in that if you raise them too much, a lot of people whose debt is no longer cheap stand to get wiped out.

It seems clear that the Bank realized from about 2010 that it might soon need to both raise and cut rates at the same time; I infer that limiting credit via the MMR was a way of raising rates without raising rates.

Conceivably the inflation and stability targets could be augmented, or perhaps replaced, with a GDP growth target, next. We’d then be in the same territory as that old saw about IT projects: on time, on budget, works - pick any two.

I tend to think we’ll trend back to historical rates and as we’re now at 0.5% it will be the 4% end of the range that we move towards first. The timing of the start of this keeps receding, but at a quarter point per calendar quarter it would take 3.5 years to get back to 4%. This suggests 2022 at the earliest before we hit 4% given that no raise is now expected before October 2018 (if then). In fact, I wouldn’t be wholly surprised if we had a fall first, and / or a pause in that upward procession. I also think that lenders will have to discount to get mortgage business, so that actual paid mortgage rates move up more slowly than base rates.

I’m thus quite optimistic that when my 10-year fix ends in 2024 I’ll be able to fix the final 4 years until payoff at quite a similar rate.

westernpromise

padington wrote: »

In this case landlords don't pass on cost savings to renters and only pass on rises.

Well, they do pass on savings, but the relevant cost savings, which are not mortgage costs.

The BoE publishes stats on renter versus mortgagor housing cost distress going back 25 years, from which it's pretty clear that mortgage rates are not the main vector of rent costs.

In 1990, interest rates doubled, house prices collapsed and renter distress rocketed. Buying the roof over your head became a really good way to lose a load of capital. Renting avoided this, so you had to pay a lot of rent to live in a place that someone else owned, and on which someone else took the capital hit. This was, of course, pre-BTL, so the landlords charging these suddenly soaring rents weren’t doing so because they had a huge leveraged portfolio; such things didn’t exist. In fact it was precisely the huge yields of the early 90s that called BTL into being in the first place.

In 2008 interest rates collapsed, house prices declined and renter distress rocketed again as landlords found they could charge more or less whatever rent they liked to people who didn’t want to wear the house price loss.

In 1997 to 2007, though, house prices went up and rents went nowhere; ditto 2010 to present.

So we have the following:

1989 to 1990 mortgage rates high, rents high, house prices down
1995 to 2008 mortgage rates low, rents flat, house prices high
2008 to 2010 mortgage rates low, rents high, house prices down
2010 to date mortgage rates low, rents flat, house prices high

…from which it seems pretty clear that landlords’ mortgage costs aren’t the determinant of rental costs. A larger factor seems to be house prices. Falling house prices send rents up; stable or rising house prices send rents down (or sideways - which is down in real and in yield terms).

So it’s not really about “landlords don’t pass on cost savings” - they do, but the cost savings they are passing on are the capital cost savings. If capital’s not at risk your rent gets cheaper, and if it is, your rent goes up.

padington

westernpromise wrote: »

Well, they do pass on savings, but the relevant cost savings, which are not mortgage costs.

The BoE publishes stats on renter versus mortgagor housing cost distress going back 25 years, from which it's pretty clear that mortgage rates are not the main vector of rent costs.

In 1990, interest rates doubled, house prices collapsed and renter distress rocketed. Buying the roof over your head became a really good way to lose a load of capital. Renting avoided this, so you had to pay a lot of rent to live in a place that someone else owned, and on which someone else took the capital hit. This was, of course, pre-BTL, so the landlords charging these suddenly soaring rents weren’t doing so because they had a huge leveraged portfolio; such things didn’t exist. In fact it was precisely the huge yields of the early 90s that called BTL into being in the first place.

In 2008 interest rates collapsed, house prices declined and renter distress rocketed again as landlords found they could charge more or less whatever rent they liked to people who didn’t want to wear the house price loss.

In 1997 to 2007, though, house prices went up and rents went nowhere; ditto 2010 to present.

So we have the following:

1989 to 1990 mortgage rates high, rents high, house prices down
1995 to 2008 mortgage rates low, rents flat, house prices high
2008 to 2010 mortgage rates low, rents high, house prices down
2010 to date mortgage rates low, rents flat, house prices high

…from which it seems pretty clear that landlords’ mortgage costs aren’t the determinant of rental costs. A larger factor seems to be house prices. Falling house prices send rents up; stable or rising house prices send rents down (or sideways - which is down in real and in yield terms).

So it’s not really about “landlords don’t pass on cost savings” - they do, but the cost savings they are passing on are the capital cost savings. If capital’s not at risk your rent gets cheaper, and if it is, your rent goes up.

So every time mortgage rates went down and landlords enjoyed increased capital appreciation, rents never went down ..

If I borrow a pound from you and you enjoy interest on my borrowing that pound more than last year and that pound becomes worth more to you when I pay it back, I might be forgiven for wanting to be charged less interest to borrow that pound this year compared to last.

Don't get me wrong, I'm not anti landlord, his trying to explain the situation as I see it.

Thrugelmir

padington wrote: »

We've seen them go down, so they can sometimes but yes again often businesses don't pass on cost savings when they don't have to which is the point I'm making. The difference being there are hundreds of mortgage providers for those that can afford a mortgage but for those that can't afford a mortgage there are none. In this case landlords don't pass on cost savings to renters and only pass on rises.

Whatever your day job involves. Obviously has little to do with actually running a business of any kind in any way. :eek:

padington

Thrugelmir wrote: »

Whatever your day job involves. Obviously has little to do with actually running a business of any kind in any way. :eek:

I meant mortgages not providers but I haven't stated anything different to what Generali said. Cost get passed on or not occording to how competitive the market is.

padington

Thrugelmir wrote: »

Whatever your day job involves. Obviously has little to do with actually running a business of any kind in any way. :eek:

if you're business was predicting house prices It would be a pretty crap business so far.

westernpromise

padington wrote: »

So every time mortgage rates went down and landlords enjoyed increased capital appreciation, rents never went down

Only in yield terms; or they flatlined.

We've seen two iterations of this in recent times. In 1993ish to 1996ish house prices levelled off, interest rates happened to go down and rents did indeed go down too.

The rent on my place in W9 has been ~£30k a year for a good 7 years now.