Bank of England - Earlier and Faster rate rises

westernpromise

triathlon wrote: »

Yes I think you are right, prices will not fall

What we have seen in London is that aggregate house prices including stamp duty have gone up a bit or flatlined. As stamp duty itself has exploded, this has meant that the total paid by buyers has stayed much the same but the actual house's price has in many areas gone down.

The net effect of stamp duty rises is that buyers are no better off but sellers are typically worse off with the state the beneficiary. This is why I always snort when some cretin suggests that stamp duty should be paid by the seller: constructively, it already is.

SDLT should be replaced with a flat rate tax based on square footage. This would ensure that people who overhouse themselves pay for doing so regardless of where they live. £14 billion in SDLT on 27 million households = £500 per household. I'd happily pay that for the next 30 years rather than squandering £100k on a transaction tax on my next house move.

triathlon

economic wrote: »

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?

The point I am trying to make was that new buyers might well put it off until they see how interests rates go and if they are effecting the market, which they probably will minimally.

Herzlos

triathlon wrote: »

The point I am trying to make was that new buyers might well put it off until they see how interests rates go and if they are effecting the market, which they probably will minimally.

Isn't the threat of a rate rise more likely to get them to buy earlier whilst they can get a good fixed rate?

triathlon

Herzlos wrote: »

Isn't the threat of a rate rise more likely to get them to buy earlier whilst they can get a good fixed rate?

Evidence right now points to buyers holding off, I can't see the mad rush to buy right now before rates rise, can you?

lisyloo

triathlon wrote: »

The point I am trying to make was that new buyers might well put it off until they see how interests rates go and if they are effecting the market, which they probably will minimally.

Agree with Herzlos.
Also new buyers may be more interested in getting the right home than trying to time the market.
When I bought my first home I wasn't that concerned about short term market movements and it was a no brainer to buy. Worries about rising interest rates and tihht budgets are easily accomodated with a fixed rate.

Most first time buyers are ordinary people and don't necessarily have a view on the market or a lot of financially acumen.

lisyloo

triathlon wrote: »

Evidence right now points to buyers holding off, I can't see the mad rush to buy right now before rates rise, can you?

Which evdence are you referrring to please?
and what makes you concllude it's related to rate concerns or yesterday's news? (I'd say it's impossible chronologically for any stats to include reaction to yesterdays news).

GreatApe

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.

Retail deposits are the biggest funding source for banks and most retail deposits earn 0% as most people don't shop for the highest interest paying accounts

So for the banks they want higher rates. If the base rate goes to 5% the banks still mostly borrow at 0% retail deposits.

£2 trillion or so in the banking system.
Maybe half in 0% accounts half in 0.5% accounts and lent out at 3%. L
Gives them 2.75% on the £2 trillion in loans = £55 billion gross income

If base rate went to 5% they would still have half the depositors on 0% and the other half on maybe 2.5% and if they could lend at 6% gives them a margin of 4.75% or £95 billion gross income.

Higher rates would be great for the banking system
If the total stock of debt does not fall much they could nearly double their gross income while their profits would be up by multiples


I'm thinking the central banks should get out of the game of setting interest rates.
Just set the base rate to 0% and let the banking system and supply and demand of credit set the price of credit.

westernpromise

GreatApe wrote: »

Retail deposits are the biggest funding source for banks and most retail deposits earn 0% as most people don't shop for the highest interest paying accounts

So for the banks they want higher rates. If the base rate goes to 5% the banks still mostly borrow at 0% retail deposits.

£2 trillion or so in the banking system.
Maybe half in 0% accounts half in 0.5% accounts and lent out at 3%. L
Gives them 2.75% on the £2 trillion in loans = £55 billion gross income

If base rate went to 5% they would still have half the depositors on 0% and the other half on maybe 2.5% and if they could lend at 6% gives them a margin of 4.75% or £95 billion gross income.

Higher rates would be great for the banking system
If the total stock of debt does not fall much they could nearly double their gross income while their profits would be up by multiples


I'm thinking the central banks should get out of the game of setting interest rates.
Just set the base rate to 0% and let the banking system and supply and demand of credit set the price of credit.

There comes a time though when a competitor comes in and pays depositors 2% while lending it out, secured, at 5%. At that point the model of borrow-for-nothing-lend-at-5% becomes unsustainable because there'll be nobody to borrow from.

The current situation is fantastic for banks because they can borrow from depositors for next to nothing and lend it out secured at 3%. Lend £100k to 30 people on that basis and every year you get the full nominal value of one of your £100k loans back, just off the interest. After 25 years, you've been given 25 of the mortgage loans back in full already but all 30 have now been repaid via mortgage instalments as well! Lovely! And necessary of course - we are still recapitalising the banks after Labour's crash, and this is how.

In effect supply and demand does price credit. I got BoE plus 0.79% for 20 years in 2007. If I needed an Amigo loan I'd need a guarantor and even then I'd pay 49%.

GreatApe

westernpromise wrote: »

There comes a time though when a competitor comes in and pays depositors 2% while lending it out, secured, at 5%. At that point the model of borrow-for-nothing-lend-at-5% becomes unsustainable because there'll be nobody to borrow from.

The current situation is fantastic for banks because they can borrow from depositors for next to nothing and lend it out secured at 3%. Lend £100k to 30 people on that basis and every year you get the full nominal value of one of your £100k loans back, just off the interest. After 25 years, you've been given 25 of the mortgage loans back in full already but all 30 have now been repaid via mortgage instalments as well! Lovely! And necessary of course - we are still recapitalising the banks after Labour's crash, and this is how.

In effect supply and demand does price credit. I got BoE plus 0.79% for 20 years in 2007. If I needed an Amigo loan I'd need a guarantor and even then I'd pay 49%.

Even before the crash when base rates were closer to 5-6% many retail depositors were in 0% savings/current accounts. That is how banks could afford in 2007 to give BOE rate +0% trackers. They were not operating on 0% margin because they don't borrow at BOE rates they mostly borrow at zero from their lazy retail depositors

Yes a competitor bank can offer 5% but that does not mean everyone moves to the competitor bank or could even do so.

In some way this is good news. It means if the base rate goes up 5% mortgage rates won't go up 5%. As a guess if the base rate goes up 5% mortgage rates would only go up 3% assuming a competitive lending market.

triathlon

GreatApe wrote: »

Even before the crash when base rates were closer to 5-6% many retail depositors were in 0% savings/current accounts. That is how banks could afford in 2007 to give BOE rate +0% trackers. They were not operating on 0% margin because they don't borrow at BOE rates they mostly borrow at zero from their lazy retail depositors

Yes a competitor bank can offer 5% but that does not mean everyone moves to the competitor bank or could even do so.

In some way this is good news. It means if the base rate goes up 5% mortgage rates won't go up 5%. As a guess if the base rate goes up 5% mortgage rates would only go up 3% assuming a competitive lending market.

And if I remember rightly rates were at 5% just before the 2007 financial crisis and people were managing just fine back then. It seems a lot of people just now are getting worked up from a stand point of things being very very easy with historical low rates to things going back to very easy should rates be raised, and if the worse comes to the worse it might become easy again.

People in the media on blogs etc want to stop blowing this out of all proportion, want is going t do the damage more than anything is sentiment.