Recent boom was 9/11 hangover?

Han_naH

If you look at the graphs here:

http://www.housepricecrash.co.uk/house-price-crash-graphs.htm

You will see that the only reason base rates went down like a flight of stairs in Sep 01, is because consumer confidence collapsed after 9/11.

Otherwise, no such "basin" or "trough" after this would exist on the graph.

The BOE were trying to boost high street and consumer spending, knowing that the inflating housing market must be addressed later.

The low interest rate period of the last 3 years shouldn't have happened. It was artificial, and a 9/11 hangover.

Without 9/11, perhaps rates would have hovered around 4.5% throughout?

Clearly the house price growth we have seen recently is inversely proporional to these low rates (cheap mortgages).

I think the graph tells the whole story!

deemy2004

The UK base rates followed the Fed Funds rate lower, though to nowhere near the same degree.

Britain has been extremely lucky, EXTREMELY !!

Why ?

Because whilst we boomed the rest of the developed world went through a recession, brought on by the stock market bear market. The main effect of this global recession was that interest rates FELL, and that inflation was subdued, so britain could go on a spending binge whilst at the same time cutting interest rates whilst inflation FAILED to rise due to global deflationary pressures.

Now the problem with this is that rates are now on the rise with the global demand picking up, so is global inflation, the only chance of delaying further rises in rates is if the recovery in the rest of the developed world, i.e. Europe and USA falters, which there is a chance that it may do so.

On top of this we have the dual effect of high crude prices, which are both inflationary and deflationary at the same time, though its anyones guess which condition is impacted more than the other.

Reaper

You will see that the only reason base rates went down like a flight of stairs in Sep 01, is because consumer confidence collapsed after 9/11.

Actually it didn't. Consumer confidence remained high. As Deemy says the consumers went on a spending spree - the high street boomed, house prices surged and debt rose. Consumers go on spending sprees when they feel wealthy (high incomes, low interest rates) and they feel confident (good job market). By ignoring the global recession they actually helped Britain survive it.

With hindsight I think interest rates fell too far in Britain, but I can understand why they did it.

9/11 did not cause the crash, of course, the circumstances for the crash were already there. The stock market had lost contact with reality. It would have happend sooner or later without it.

As a complete aside - since people keep mentioning https://www.housepricecrash.co.uk did you know it's first birthday is today (26th October). I feel like writing to the people who run it to ask if they all sold their houses a year ago. If so they missed out on some serious money!

Han_naH

Yes I don't predict a crash either, and no fan of the site.

I remember well that people weren't spending... the drop in interest rates helped generate this.

Yes Deemy the boom we have seen stems from the CONFIDENCE people have in the value of their house. In some cases people have actually remortgaged to spend! The IMF have said this again and again: Britain's economic prowess is on the back of inflated house prices, and those prices are the only major fault-line, or risk in our continued economic growth.

Also, Deemy mentions higher int. rates are due if the boom continues. No worries there my friend, as you refer only to monetary tightening. The other lever is fiscal tightening - Gordon Brown's tax rises once re-elected. And we know he's in the red...

deemy2004

Yes I don't predict a crash either, and no fan of the site.

Also, Deemy mentions higher int. rates are due if the boom continues.  No worries there my friend, as you refer only to monetary tightening.  The other lever is fiscal tightening - Gordon Brown's tax rises once re-elected.  And we know he's in the red...

I don't think either that rates will rise much during 2005, maybe even fall a but towards the tail end.

But Gorden browns borrowing spree has the effect of pushing UK rates higher than they would otherwise be, i.e. the govs spending more than its earning so to finance the debt they need to attract money with higher interest rates than other currencies, the greater the borrowing requirement the higher rates will need to go hence tax rises are needed to help reduce this borrowing requirement

Pal

But Gorden browns borrowing spree has the effect of pushing UK rates higher than they would otherwise be, i.e. the govs spending more than its earning so to finance the debt they need to attract money with higher interest rates than other currencies, the greater the borrowing requirement the higher rates will need to go hence tax rises are needed to help reduce this borrowing requirement

Not sure I understand this comment. You are suggesting that interest rates increase as a direct result of the Government's need to borrow more, and they do this by raising the interest rates payable on Government debt (bonds presumably)?

Interest rates for borrowing are set by the BoE, so there should not be any direct link between them and Government spending. A possible indirect link would be where the Gov spending leads to increased inflation, which causes the BoE to put up interest rates, but personally I think other economic factors (e.g. oil prices) would have a far larger impact.

It is interesting how you describe the house boom as "lucky". The boom in house prices has been entirely financed by increased debt, and very few people will actually have made any profit out of it. Most home owners have simply traded debt for paper profit that they cannot realise without selling up. Many have increased their mortgages without even moving house.

Those who are in the best position have simply not increased their debts but are now sitting on a larger paper profit than before, in the form of more home equity. Until these people sell and start renting they have not made a real profit either.

While all of this meant that the UK managed to weather a potential recession period without suffering more than a slowdown, I think it is far too soon to say that we have been "lucky" given the potential problems that have been created. I suggest we discuss this again in 10 years time and find out how lucky we all feel then. ;D

deemy2004

Briefly

Yes, but its all linked together

I.e. government borrowing, inflation, growth, interest rates and exchange rates

When governments borrow, they pump more money into the economy thus increasing inflation and growth and thus you get a rise in interest to control inflation and to support the currency to finance the government debt and trade imbalance, as if the currency fell ! Inflation would rise and so would interest rates ! all linked and feeding off each other.

Obviosuly there are many more variables than those such as the impact of the housing market, wage price pressures, crude oil prices etc.

I said Britain has been lucky - so far ! especially when compared to the rest of the developed world. Look at America for instance ! Gordon Browns borrowing peanuts compared to the amount of debt they have racked up in recent years with little to show for it.

Han_naH

Once again, you are not admitting that taxes have been used to put the brakes on inflation, and will be used again.

To use interest rates only would be peverse, and seen in the latter years of the Tory Govt, (rates at 15%).
In fact, Thatcher took the lid off by reducing personal and corporate taxation, removing this lever as a means to stop inflation. They then pulled the other lever so hard that the country "broke"!

Good to see that Pal concurs that house prices have indeed allowed us to avoid recession.
Interesting that much of Europe, certainly the Germans do not have this dimension to their societies.
That is, property ownership and the spending power that stems from it.

For that, we can thank Thatcher, who changed housing law so that becoming a Landlord became worth it.
Until then you had this pro-tenant legislation - like the Germans have.

They must be looking at us successful Brits most unhappily.

Running_Horse

leejp wrote: »

They must be looking at us successful Brits most unhappily.

Are you sure about that?

kmmr

I do love a good resurrection of a thread. What got your attention here Running Horse!?