How will this new money stop house prices decreasing

evosy1978

Someone said to me to day that the deal between the BoE and the PM to help the mortgage lenders with their money problems would help curb the HPC.

can someone explain to me how this works?

thanks

mr.broderick

evosy1978 wrote: »

Someone said to me to day that the deal between the BoE and the PM to help the mortgage lenders with their money problems would help curb the HPC.

can someone explain to me how this works?

thanks

!!!!!! has a thread on this i think, well, he's got a thread on everything else...

Dan:_4

The idea is to get funds in the system so the banks will start lending again.

ManAtHome

The way it works is McBroon slings heaps of taxpayers dosh at the banks so the over-indebted can hang on until after the next election (where he might ask for a vote unlike Mugabe who just fiddles the numbers... errrm unlike McBroon).

Unfortunately, this devalues the quid, which puts prices up, and also reduces returns on Gilts which robs pension annuity returns. So you get yer spoonful of jam today, and end up skint in a few years time when the "make blair rich" project has reached fruition (only a couple of mill a year from JPM for bankrupting poundland and making ...errrm... JPM ok thank you very much) and McBroon has swanned off with his "better than thou" gold/platinum-plated pension in a few years time...

EdInvestor

evosy1978 wrote: »

Someone said to me to day that the deal between the BoE and the PM to help the mortgage lenders with their money problems would help curb the HPC.

can someone explain to me how this works?

I'm sure that numerous journalists are trying to stop their heads spinning as they mug up on this very thing as we speak.Don't worry, it will be all over the papers at the weekend.

The basic point is that although most people probably think that the banks take in people's savings and then lend the money out to other people to buy houses, it's a bit more sophisticated than that these days.

About 70% of the money lent out actually comes from other sources, such as money borrowed from other banks via the "interbank market". The interest rate in this market is usually much the same as the base rate, so in the past when the BoE raised or lowered interest rates, your mortgage rate would act accordingly, because the loans would be priced at muc the same level.

But now, because of the credit crunch, this interbank market is not working properly, and its interest rate is persistently about 1% or more higher than bank rate.What's more there is no money being borrowed or lent. Hence, mortgage rates are going up and mortgage money is being rationed.

The idea of these new measures is to get the interbank market working normally again by enabling the banks to lend and borrow from each other at normal rates.They need a breathing space until they can get rid of all these debts relating to the sub prime crisis so that there is no longer any worry that if they lend to a fellow bank they might not get the money back.

The reason why it's taken so long to get this organised is that the Government wants to make sure there's no risk to the taxpayer from helping the banks, especially after all the criticism over Northern Rock.The plan has already been tried out in America satisfactorily, so it should also work here, as we have less of a problem.

Once the mortgage interest rates come down and the mortgage money is flowing again, house prices should stabilise.It's unlikely though that the banks will go back to some of the sillier lending of the recent past, so don't expect prices to start rising again for a while.

m00m00

the banks have lost unknown billions over silly mortgages

i'm sure they'll all be rushing in to burn more money by throwing mortgages at just anyone who asks again, at silly multipliers at 125% LTV

BobProperty

EdInvestor wrote: »

....The plan has already been tried out in America satisfactorily, so it should also work here, as we have less of a problem.....

I'd better nip over to the US forums I go on and tell them the good news because I can assure you the posters over there haven't seen anything of the sort.

brit1234

Its too late, prices are plummeting. All those fraudulent obtained mortgages will start to appear on British Lenders books and they will be back to square one. There are simply too many poor mortgages to palm them off to the BOE.

Hopefully the BOE will realise before it is too late. Why should the tax payer pay for these dodgy mortgages rather than the shareholders?

ianmr65

EdInvestor wrote: »

I'm sure that numerous journalists are trying to stop their heads spinning as they mug up on this very thing as we speak.Don't worry, it will be all over the papers at the weekend.

The basic point is that although most people probably think that the banks take in people's savings and then lend the money out to other people to buy houses, it's a bit more sophisticated than that these days.

About 70% of the money lent out actually comes from other sources, such as money borrowed from other banks via the "interbank market". The interest rate in this market is usually much the same as the base rate, so in the past when the BoE raised or lowered interest rates, your mortgage rate would act accordingly, because the loans would be priced at muc the same level.

But now, because of the credit crunch, this interbank market is not working properly, and its interest rate is persistently about 1% or more higher than bank rate.What's more there is no money being borrowed or lent. Hence, mortgage rates are going up and mortgage money is being rationed.

The idea of these new measures is to get the interbank market working normally again by enabling the banks to lend and borrow from each other at normal rates.They need a breathing space until they can get rid of all these debts relating to the sub prime crisis so that there is no longer any worry that if they lend to a fellow bank they might not get the money back.

The reason why it's taken so long to get this organised is that the Government wants to make sure there's no risk to the taxpayer from helping the banks, especially after all the criticism over Northern Rock.The plan has already been tried out in America satisfactorily, so it should also work here, as we have less of a problem.

Once the mortgage interest rates come down and the mortgage money is flowing again, house prices should stabilise.It's unlikely though that the banks will go back to some of the sillier lending of the recent past, so don't expect prices to start rising again for a while.

Ed i appreciate you're trying to keep it simple, and you are right in most of what you say. but it's slighly more complicated than this.

1) Interbank lending:

Global credit markets are frozen. or as near as dammit. And the credit default swap markets are frozen. No amount of injected liquidity from the BoE to UK banks will unfreeze them.
Yes UK banks need to lend to each other, but banks need to access global credit market liquidity as well.

2) Collaterised debts, and collateralised debt derivatives.
Many banks have been borrowing heavily against their parcelled up mortgage/ other debt assets which have been widely sold in tranches, and sub tranches and taking on debt from the US in the same way.
Many of these assets are now worth a great deal less than they once were. The ulitmate creditors are getting mighty nervous, and the senior tranche holders (normally the biggest banks) are, making margin calls, and or liquidating the asset, (ie calling in the intrest or the whole loan) and not passing anything down the chain. (as they are losing money anyway)
This is leaving great gaping holes in bank balance sheets
The banks have been very reluctant to fess up to these holes. Whcih is why Brown keeps banging on about them. Its not that they are in debt due to sub prime, it's that assets they once had ARE NO LONGER THERE. gone up in a puff of smoke. Written off.
No amount of interbank lending will fill these holes. So banks are going to be extremly reluctant to raise money in this way again. Hence the massive reduction in the number of available mortgage products.


3) The assumption you make is that the only reason that house prices are falling is that the mortgage supply has dried up. This is along way from being the whole story.
The housing bubble, was partially about cheap credit, 125% mortgages, and 6 times joint salary, sure but also about a lot of other things. -
The mistaken belief that house prices would always rise. The willingness of people to borrow way beyond there means based on that beleif. The buy to let / rent return fallacy. The myth that housing stock is in short supply. The inflated valuations that property developers made, and the fact that lot's of people have recently made lots of money from property.

That bubble has now burst. People are staring negative equity in the face, and they do not like it. It will take years before all that fades from memory.

Meanwhile you have lots of FTB's who are gonna sit tight, and buy in two or three years, And gazunder.
Meanwhile lots of people are going to be stuck in a house or flat they don't want to live in, can't sell, can't get a better mortage on, and who will paying far more than the house is worth, in mortage intrest, and capital and giving up, and handing back the keys. So lot more repossssed stock comming on the market and sitting empty, driving prices down still further.

The IMF are predicting 27%, drop and banks are risk pricing higher than 75% ltv. This gives you an indication of how far the market is likely to fall, with or without the interbank liquidity comining back. 30% is my guestimate.

spencer24

brit1234 wrote: »

Its too late, prices are plummeting. All those fraudulent obtained mortgages will start to appear on British Lenders books and they will be back to square one. There are simply too many poor mortgages to palm them off to the BOE.

Hopefully the BOE will realise before it is too late. Why should the tax payer pay for these dodgy mortgages rather than the shareholders?

I agree that's too late. Also even if the market is flooded with new cheap money, if nobody wants to borrow then you have a problem...