UK Inflation Rate

Koldweather1

The real issue Greatape is wage inflation. As you say inflation are never going to be too detatched in a normal economy. However if wage inflation is not keeping up, something does have to give. It won't be the rent/mortgage, nor bills or food, so what suffers is the extra fluff around the economy.

Also, whilst the 3% inflation rate feels like its high, that is only because wage inflation has been stagnant and they were at historic lows. In truth, 3% is still quite low in historic terms, as is 0.5% interest rates.

economic

GreatApe wrote: »

The economy will react to interest rates. If interest rates move to 10% and stay there the economy will move towards 12% inflation.

What choice does the economy/business/government have if the BOE foolishly moved interest rates to 10%?

Either we enter a depression and all stop spending to save up pieces of paper for the 10% interest on them. Or business and government adjust to increase prices by about 12% a year so that the machinery of civilisation doesn't grind to a halt. Simply put real rates can't be very high typically they will be -2 to +2%

So higher rates will lead to higher inflation. In a high inflation environment houses won't crash in nominal price because people would be getting annual 10-15% pay increases and use their higher wages to bid higher prices.

This is obvious if you look at higher base rate countries.
Eg Turkey has 9% base rate so does that mean house prices were falling?
No they have doubled in five years because inflation is about 12% in the country.


House prices are almost fully determined by the local economy
Strong local economy strong house prices
Weak local economy weak house prices

Real rates were around 5% in the 90s, and between 5-10% for much of the 80s. Since the crisis in 08 real rates have trended downwards and are firmly negative. Why?

Interest rates are simply the price of money. Having high positive rates reflect an economy that is in demand for capital, there is growth going on, productivity is high and capital investments high too. But crucially there is spare capacity at the same time so that inflation doesn't go through the roof, hence there is high positive real rates.

Currently we have negative real rates. There is quite a bit of spare capacity in the economy so inflation is more or less not a problem. The problem is low nominal rates as there is no demand for capital currently. This is because businesses do not want to invest, productivity is not expanding (although it is stable more or less), growth is low. Perhaps this is the new normal now for the foreseeable future.

The huge shift we have seen over the past few decades is to do with technology and globalization. Technology has enabled high levels of competition and has effectively priced out many businesses (think Amazon vs retail). So what you have is margins collapsing because someone cares primarily about market share more so then earnings. This is not just in retail. This is pretty much everywhere you look. Films/entertainment, hospitality, takeaway/restaurants, education etc etc. there are sectors contrary to this of course, things like technology itself, financials etc. Even financials are being taking over by fintech.

Globalization has meant that factories and machinary and plants are located overseas where there exists cheap labour. So even though there is demand for capital investment, its done overseas and not within the UK. So we had seen emerging market economies grow in double digits in the 2000s.

I do not see high positive real rates anytime soon. They will probably hover between -2% and 2%. This suggests that the need to build wealth is reduced, technology is taking over and enabling things to be cheaper and cheaper.

HAMISH_MCTAVISH

tara747 wrote: »

Take two people as an example.

One bought in 1988, near the top of the market with only a 10% deposit. They got a loan easily, but the repayments crippled them and they were in negative equity for years The eventually paid off their mortgage 25 years later, in 2013.

The other saved for an extra 7 years and bought in 1995, near the bottom of the market. The banks weren't lending so freely, but houses were a lot cheaper. They had managed to save a 50% deposit, which got them a lower interest rate, and they paid off their mortgage in 10 years. They were mortgage-free by 2005 :beer:

Lets take a more recent example...

One bought near the top of the market in 2007, and enjoyed 11 years of record low interest rates, so has now almost paid off the mortgage in full for less than the cost of renting since 2007.

The other was holding out for a crash and was going to buy as soon as prices fell, but then got caught out by soaring rents and mortgage rationing. They're still renting... paying their landlords mortgage instead of their own... and massively increasing their lifetime housing costs.

Crashy_Time

HAMISH_MCTAVISH wrote: »

Lets take a more recent example...

One bought near the top of the market in 2007, and enjoyed 11 years of record low interest rates, so has now almost paid off the mortgage in full for less than the cost of renting since 2007.

The other was holding out for a crash and was going to buy as soon as prices fell, but then got caught out by soaring rents and mortgage rationing. They're still renting... paying their landlords mortgage instead of their own... and massively increasing their lifetime housing costs.

Another one thought oil would go up in price forever, then it didn`t, he now realises that he would have more chance of a job on the Isle of Wight, just as his house loses 40% in value....
:rotfl:

westernpromise

Crashy_Time wrote: »

Another one thought oil would go up in price forever, then it didn`t, he now realises that he would have more chance of a job on the Isle of Wight, just as his house loses 40% in value....
:rotfl:

When it loses 130%, Crashy, you'll be able to buy it off him for less than it's cost you to rent for 22 years. Fingers crossed, eh!

westernpromise

Crahy's situation is tragic beyond belief. In the time he's been renting one bedsit he could have bought it outright plus a second one to rent out, and he'd be clear of both mortgages by now.

Instead he has a lifetime of renting in front of him and won't be ahead unless prices fall 130%.

tara747

HAMISH_MCTAVISH wrote: »

Lets take a more recent example...

One bought near the top of the market in 2007, and enjoyed 11 years of record low interest rates, so has now almost paid off the mortgage in full for less than the cost of renting since 2007.

The other was holding out for a crash and was going to buy as soon as prices fell, but then got caught out by soaring rents and mortgage rationing. They're still renting... paying their landlords mortgage instead of their own... and massively increasing their lifetime housing costs.

I'm in NI. The above doesn't apply Prices fell 70% in most areas, rents haven't budged. Not buying in 2005-07 was a very smart decision. Ask any of my friends who are still in negative equity, with 20 years remaining on their mortgages.

HAMISH_MCTAVISH

tara747 wrote: »

I'm in NI. The above doesn't apply

Fair enough. But it does apply in the other 95% of the UK.

Crashy_Time

westernpromise wrote: »

Crahy's situation is tragic beyond belief. In the time he's been renting one bedsit he could have bought it outright plus a second one to rent out, and he'd be clear of both mortgages by now.

Instead he has a lifetime of renting in front of him and won't be ahead unless prices fall 130%.

Could be worse, I could have been ranting on property forums since 1996.

John-K_3

Crashy_Time wrote: »

Could be worse, I could have been ranting on property forums since 1996.

May I ask, how far do prices need to drop for you to break even?