Advice: Interest Rates going up and house prices going down

Sarah1Mitty2

Strummer22 said:

Sarah1Mitty2 said:

As another poster pointed out recently, historical average for base rate is over 7%, we are not really "high" yet?

The fact that the "historical average" is 7% has been repeated a lot on this forum lately. I think this is referring to the average since about 1971 or something like that? I'm not sure why we should be ignoring data before that, but never mind.

The 7% figure over this timescale is accurate: 


However, the rate never went below 5% between the early 70s and the early 90s.

Taking the Nationwide house price index (https://www.nationwidehousepriceindex.co.uk/download/uk-house-prices-since-1952), the annual increase averaged 12.4% from 1971 - 1992, and only 5.7% from 1993 onwards.

So at what time was there (more than one) speculative bubble, enormous house price growth, enormous wage growth, entrenched inflation and crippling interest rates? Was it before 1993? (YES). At any point did houses lose 50-60% of their value, as some are suggesting will happen? (NO). As the preacher said, "there is nothing new under the sun".

What is abundant clear to me is that a 'historical average' interest rate, in isolation, does not equal 'normal'. If we revert to this supposed 'normal' interest rate just because it is the historical average over an arbitrary timeframe, by that logic we would also revert to a historical average house price growth, wage growth, inflation and economic growth. Saying interest rates are not 'high' by historical standards, taken in isolation, is pretty meaningless.

!st bold point; No, because up until 15 or 20 years ago mortgage lending was based on how much people could afford as measured in salary multiples (and we had zero rates for 14 years so everyone could pretend that borrowing  7 or 8 times your salary was somehow "normal"!) We are now at an inflection point as rates return to historical averages (I think base rate could reach 8 or 9% if there are any "inflation shocks" in the pipeline)

2nd bold point;  Are you saying that HPG, wages, inflation and economic growth will somehow detach from the reality of base rate at 5% (and rising) ? You are betting against central bank intention there and I would be interested to hear why you think this.

CSI_Yorkshire

Sarah1Mitty2 said:

Strummer22 said:

Sarah1Mitty2 said:

As another poster pointed out recently, historical average for base rate is over 7%, we are not really "high" yet?

The fact that the "historical average" is 7% has been repeated a lot on this forum lately. I think this is referring to the average since about 1971 or something like that? I'm not sure why we should be ignoring data before that, but never mind.

The 7% figure over this timescale is accurate: 


However, the rate never went below 5% between the early 70s and the early 90s.

Taking the Nationwide house price index (https://www.nationwidehousepriceindex.co.uk/download/uk-house-prices-since-1952), the annual increase averaged 12.4% from 1971 - 1992, and only 5.7% from 1993 onwards.

So at what time was there (more than one) speculative bubble, enormous house price growth, enormous wage growth, entrenched inflation and crippling interest rates? Was it before 1993? (YES). At any point did houses lose 50-60% of their value, as some are suggesting will happen? (NO). As the preacher said, "there is nothing new under the sun".

What is abundant clear to me is that a 'historical average' interest rate, in isolation, does not equal 'normal'. If we revert to this supposed 'normal' interest rate just because it is the historical average over an arbitrary timeframe, by that logic we would also revert to a historical average house price growth, wage growth, inflation and economic growth. Saying interest rates are not 'high' by historical standards, taken in isolation, is pretty meaningless.

2nd bold point;  Are you saying that HPG, wages, inflation and economic growth will somehow detach from the reality of base rate at 5% (and rising) ? You are betting against central bank intention there and I would be interested to hear why you think this.

No, you're saying that, they're saying the opposite.

Their point, quite correctly, is that if saying "we will go back to the historical average" is right for base rate for no other reason than "it's the historical average", then that same statement would be equally true for every other statistic that also has a historical average.

More evidence is needed than just "that's what it used to be".

Sarah1Mitty2

CSI_Yorkshire said:

Sarah1Mitty2 said:

Strummer22 said:

Sarah1Mitty2 said:

As another poster pointed out recently, historical average for base rate is over 7%, we are not really "high" yet?

The fact that the "historical average" is 7% has been repeated a lot on this forum lately. I think this is referring to the average since about 1971 or something like that? I'm not sure why we should be ignoring data before that, but never mind.

The 7% figure over this timescale is accurate: 


However, the rate never went below 5% between the early 70s and the early 90s.

Taking the Nationwide house price index (https://www.nationwidehousepriceindex.co.uk/download/uk-house-prices-since-1952), the annual increase averaged 12.4% from 1971 - 1992, and only 5.7% from 1993 onwards.

So at what time was there (more than one) speculative bubble, enormous house price growth, enormous wage growth, entrenched inflation and crippling interest rates? Was it before 1993? (YES). At any point did houses lose 50-60% of their value, as some are suggesting will happen? (NO). As the preacher said, "there is nothing new under the sun".

What is abundant clear to me is that a 'historical average' interest rate, in isolation, does not equal 'normal'. If we revert to this supposed 'normal' interest rate just because it is the historical average over an arbitrary timeframe, by that logic we would also revert to a historical average house price growth, wage growth, inflation and economic growth. Saying interest rates are not 'high' by historical standards, taken in isolation, is pretty meaningless.

2nd bold point;  Are you saying that HPG, wages, inflation and economic growth will somehow detach from the reality of base rate at 5% (and rising) ? You are betting against central bank intention there and I would be interested to hear why you think this.

No, you're saying that, they're saying the opposite.

Their point, quite correctly, is that if saying "we will go back to the historical average" is right for base rate for no other reason than "it's the historical average", then that same statement would be equally true for every other statistic that also has a historical average.

More evidence is needed than just "that's what it used to be".

But base rate isn`t moving "because it is the historical" average, it is moving for other reasons, one of them being that central banks are no longer going to supress rates to bail out debt-holders because it is causing too much inflation, there will be various historical economic reasons why base rate was X at any particular time but the "historical average" will have a lot to do with lack of central bank interference in setting the rate. As I said be prepared for higher base rates, I am preparing for 8% by keeping an aye on the best rate savings accounts on MSE.

CSI_Yorkshire

So you entirely agree with the point they made.  Good, so do I.