Bank of England - Earlier and Faster rate rises

Thrugelmir

Filo25 wrote: »

I think it is probably a more balanced debate if we weren't still at what are effectively emergency rates, but in the face of rising global growth, it seems likely that we will see some gentle tightening in one form or another from most of the central banks.

To maintain the status quo whatever the Fed does. Others will follow. The UK needs to borrow on the international money markets. Yields on offer will matter.

Finally good news for savers. Which in itself is going to help rebalance the economy. No longer be fashionable to leverage up with debt.

triathlon

What also needs to remembered that the threat of rising rates is down to a strong economy, house prices just do not fall when people are coining it in, that's just simple logic.

westernpromise

AG47 wrote: »

Higher and faster than most thought?

Well most didn't think these near zero rates would last almost ten years...

How long will it take for interest rates to get back to normal?

There's an argument that current mortgage rates are in fact already close to long-term normal.

The idea that normal is 10 to 15% comes from the early 90s, but in fact base rates have only been over 10% in 20 of the last 300 years, and all 20 were between 1970 and 1995. This was basically oil price and then German reunification related.

Those unrepresentative years aside, mortgage rates of 4 to 6% were always the norm, so current typical rates of 3.5% or so are not far off the pace.

It's also conceivable that base rates could go up but mortgage rates could come down. A bank lending £1,000 at 3.5% is borrowing it at 0.5%, and is thus spending £5 on borrowing to receive £35 back on lending. The £1,000 is not a factor because it's secured. So that's a 600% gross margin.

That level of markup is far more remarkable and out of whack with historicals than the 3.5% rate in itself. In 1990, a typical mortgage lender borrowed at 15% and lent it out at 17%, which is a mere 13.3% margin. One of the headaches for Carney is almost certainly the solidity of banks when they are no longer able to rely on gross lending margins 45 times higher than what has historically been usual.

However, what this does mean is that rates could go up to 2%, but if this chokes off the public appetite for mortgage debt, mortgage rates come then down to 3%. Banks have plenty of room to cut the price of money; to borrow at 2 and lend out again at 3 is still an epically huge margin. As banks are in the business of lending, they're likely to do whatever it takes to get people to borrow.

Thrugelmir

westernpromise wrote: »

Banks have plenty of room to cut the price of money.

Where's the cheap funding coming from? BOE support has now ceased. Lenders shortly will start repaying the money lent under the mortgage funding for lending scheme. US banks, in particular JP Morgan, own a huge slug of RMBS issuance. All the fixed term product mortgages out there will need refinancing in due course. The UK needs to remain an attractive option. To compete with the safety offered by US Treasuries or UK Gilts or German Bunds.

triathlon

westernpromise wrote: »

There's an argument that current mortgage rates are in fact already close to long-term normal.

The idea that normal is 10 to 15% comes from the early 90s, but in fact base rates have only been over 10% in 20 of the last 300 years, and all 20 were between 1970 and 1995. This was basically oil price and then German reunification related.

Those unrepresentative years aside, mortgage rates of 4 to 6% were always the norm, so current typical rates of 3.5% or so are not far off the pace.

It's also conceivable that base rates could go up but mortgage rates could come down. A bank lending £1,000 at 3.5% is borrowing it at 0.5%, and is thus spending £5 on borrowing to receive £35 back on lending. The £1,000 is not a factor because it's secured. So that's a 600% gross margin.

That level of markup is far more remarkable and out of whack with historicals than the 3.5% rate in itself. In 1990, a typical mortgage lender borrowed at 15% and lent it out at 17%, which is a mere 13.3% margin. One of the headaches for Carney is almost certainly the solidity of banks when they are no longer able to rely on gross lending margins 45 times higher than what has historically been usual.

However, what this does mean is that rates could go up to 2%, but if this chokes off the public appetite for mortgage debt, mortgage rates come then down to 3%. Banks have plenty of room to cut the price of money; to borrow at 2 and lend out again at 3 is still an epically huge margin. As banks are in the business of lending, they're likely to do whatever it takes to get people to borrow.

I am willing to bet, outside property investors, that a 3% rise would hurt fewer than 5% of homeowners.

triathlon

Reading about this article now, and this is the annoying bit with the BOE. This rumour as we all know is being put out there by the BOE for feedback. Now if they are going to put rates up in May like I have just been reading, why not just do it now. There are now an Army of FTB's who are now going to wait until May at least, and if they are told more could follow they will again hold off.

This is where the BOE need to get decisive and act quick, what we do not need is people waiting on the sidelines

economic

triathlon wrote: »

Reading about this article now, and this is the annoying bit with the BOE. This rumour as we all know is being put out there by the BOE for feedback. Now if they are going to put rates up in May like I have just been reading, why not just do it now. There are now an Army of FTB's who are now going to wait until May at least, and if they are told more could follow they will again hold off.

This is where the BOE need to get decisive and act quick, what we do not need is people waiting on the sidelines

Why would people wait to buy after they hiked rates? Surely they would instead just buy now to lock in rates? Thats even if it matters that much, is a 25bps increase in mortgage rates more important then finding the perfect home and just buying it?

Graham_Devon

triathlon wrote: »

Reading about this article now, and this is the annoying bit with the BOE. This rumour as we all know is being put out there by the BOE for feedback. Now if they are going to put rates up in May like I have just been reading, why not just do it now. There are now an Army of FTB's who are now going to wait until May at least, and if they are told more could follow they will again hold off.

This is where the BOE need to get decisive and act quick, what we do not need is people waiting on the sidelines

Not sure I follow your logic.

If someone was able to go ahead and buy a house this month, having found a house they want to buy - why would they wait until May (or longer), forego the house they have found, and then pay a HIGHER interest rate on a mortgage a couple of months later?

Even I, as someone who want's to see house prices fall understands that they are very unlikely to fall by large enough amounts over the net 3 months to make it worthwhile paying a higher interest rate.

The only people who are likely to not buy right now are those with cash in the bank who forsee a crash over the next couple of years and are quite happy renting.

But those people aren't your day to day housebuyer.

When house prices DO start falling though in larger percentages, THEN people hold back buying due to fear.

But not now. Not in general.

triathlon

Graham_Devon wrote: »

Not sure I follow your logic.

If someone was able to go ahead and buy a house this month, having found a house they want to buy - why would they wait until May (or longer), forego the house they have found, and then pay a HIGHER interest rate on a mortgage a couple of months later?

Even I, as someone who want's to see house prices fall understands that they are very unlikely to fall by large enough amounts over the net 3 months to make it worthwhile paying a higher interest rate.

The only people who are likely to not buy right now are those with cash in the bank who forsee a crash over the next couple of years and are quite happy renting.

But those people aren't your day to day housebuyer.

When house prices DO start falling though in larger percentages, THEN people hold back buying due to fear.

But not now. Not in general.

Yes I think you are right, prices will not fall

Carl31

it wasnt that long ago they were cutting rates due to economic Armageddon, i think ill wait until i worry about this just yet