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Posts Tagged ‘Bank of England’

Bank Rates Cut, but don’t expect the savings to be passed on

Posted by Mark Harrison on November 7, 2008

Yesterday, the Bank of England cut its base rate by 1.5%… taking it down from 4.5% to 3%. Today, the newspapers are full of stories about “greedy bankers” not passing on the rate cuts.

This makes good headlines, after all, we all understand that banks have a lot of money yes?

Well, no actually. The problem isn’t the rates – the problem is the fact that most banks DON’T have a lot of money – at least, they have a lot LESS money than people want to borrow.

The way that interest rates tend to work is as a sort of bidding mechanism. Suppose that we have three people:

  • Dave wants to borrow £100, and will pay 8% interest
  • Sharon wants to borrow £100, and will pay 7% interest
  • Steve wants to borrow £100, and will pay 6.5% interest

You have £100, that you’d like to lend out. Who will you lend it to?

Well, all other things being equal, I’m guessing that you’ll lend to Dave at 8%. OK, it’s more complex, because you’ll probably take into account Dave’s “track record” and other assets, but let’s assume that you know them all equally well, and take the view that each of them is as likely to pay you back as the other.

Now, the Bank of England cuts its rates by a third. Let’s re-run the question:

  • Dave wants to borrow £100, and will pay 8% interest
  • Sharon wants to borrow £100, and will pay 7% interest
  • Steve wants to borrow £100, and will pay 6.5% interest

You have £100, that you’d like to lend out. Who will you lend it to?

If you answered “Dave at 8%”, then you’re a greedy, bloated capitalist. After all, you SHOULD, according to newspaper logic, now be lending at 6.5%. Obviously, you now have a choice of people to lend to – and it really doesn’t matter which one you lend to, because you should be willing to accept the lower return?

Huh? How’s that meant to work then? Surely the idea is that you lend to the person who has the best mix of “rate (s)he’ll pay” and “likelihood of paying back”, depending on how risky you’re feeling, and what other loans you’ve got out there at the moment. You don’t just slash your rates.

The mechanism that ACTUALLY causes rates to be cut is COMPETITION. If you are only lending at 8%, and I come in, with £200, willing to lend at 7%, then you will either get no business at all (and therefore 0%), or you’ll have to drop to 7% to get someone’s business, and you and I will fight it out to make Dave and Sharon both think that we’re a good lender. Obviously, Steve still doesn’t get his loan… unless one of us decides that 6% is better than nothing, and drops the rates again.

The basic problem is twofold:

  • There’s still far more of an appetite for loans that there is cash in the lenders’ pockets
  • The Government are insisting that banks INCREASE the amount of cash they keep “in reserve” and DON’T lend out, so that they can avoid another Northern Rock.

Very few banks actually borrow from the Bank of England. It’s the Lender of last resort. Kick-starting the mortgage process again isn’t about reducing a “published” rate – it’s about making cash available, and the only real way to do THAT causes inflation, and headlines about the price of bread and fuel increasing. At the moment, inflation still looks a scarey risk.

My “out on a limb prediction”? Give it another year, and the Government will decide that enough is enough, and the pain of inflation is less bad than the paid of more business failures and redundancies – until then, expect headlines about greedy bankers but not real solutions.


Posted in Economics, Property Investment | Tagged: , | 8 Comments »

Bank of England minutes – and WHAT will interest rates do next?

Posted by Mark Harrison on July 23, 2008

This morning, the Bank of England published the minutes from the meeting of the MPC on the 9th-10th July.

A few interesting things in there, not least of which is that UK house prices have now falled 8% from their peak, and that mortgage approvals are only being given at 1/3 of the rate they were 18 months ago… but there was a surprise in how the vote went.

Obviously, we knew that the rate was held at 5%, but the voting went:

  • For holding at 5% – 7 votes
  • For dropping to 4.75% – 1 vote
  • For raising to 5.25% – 1 vote

Apart from that, there’s a quote that we may want to hold onto for a few weeks:

A rate change this month would be a surprise at a time when credit and other financial markets remained fragile, and any change in rates would be better communicated alongside the Bank’s August Inflation Report.

Tricky times ahead. Inflation suggests that rates need to go up. Consumer confidence (in both shares and houses) suggests that it needs to come down.

My take on property investment is still “wait and see” – there will be many more great deals around in 6 months’ time.

Posted in Economics, Property Investment | Tagged: , , | Leave a Comment »

Today’s blog is brought to you by the number 7 and the word “Stagflation”

Posted by Mark Harrison on May 21, 2008

OK, readers of a certain age will have been expecting the letter S, rather than the whole word, but Stagflation is one of those things that seems to have hit us hard.

7 is, of course, the number of members of the Bank of England’s MPC who voted to keep interest rates at 5.0% this month. The eight member (David Branchflower) voted for a small cut in the rate.

The problem is, of course, that if you put rates UP, then everyone gets hit in the pocket when their mortgages come due each month…

… but if you put rates DOWN, then that tends to increase inflation (which, at almost 3% is well above the 2% target), so we’ll all end up paying more for things… and proportionately more again for imported things since cutting interest rates means that fewer people want to buy pounds… so it takes more pounds to buy a set number of Yuan.)

As far as I can make out, imported goods make up about 100% of my non-food purchases this week (and the food purchases are only lower because I’m in the fortunate position where I can afford to support local farmers rather than overseas batteries.)

The big problem for most people with mortgages (investors or not) is that the gap between the BoE base rate and the rate that lenders actually charge is still a lot higher than it was. The base rates are looking less and less like a good tool to manage consumer housing finance – and, while I’m not normally a fan of government intervention in these things, more liquidity would help.

Of course, the overall lesson, and one I’ve been writing about since 2004, is that NO GOVERNMENT CAN BREAK BOOM AND BUST.

We’re going through a global slump – realistically, there’s little the government can do to help. Of course, the flip side was that they can’t take credit for the last 10 years of boom either, since that was also a global thing… but, of course, they DID take the credit, so it’s only fair that they take the blame on the same basis 🙂

Posted in Economics, Property Investment | Tagged: , , | Leave a Comment »

UK Government to enter securitisation market?

Posted by Mark Harrison on April 16, 2008

One of the most popular articles I’ve ever written on this blog has been What is Mortgage Securitisation, and Why Does it Matter?

If you don’t have time to read it, here’s the 30-second summary:

  • Some lenders lend their own money to people who want mortgages
  • Other lenders do, but rather than being owed those loans themselves, or passing individual loans over to other banks, set up special-purpose “companies” whose only role in life is to “own the debt” and then sell shares in those companies…
  • … they then use the money raised from those shares to fund the next round of loans / mortgages they make.

These shares are called “mortgage-backed securities” (MBSs)… because “security” is a technical term (used more in the US than here) for “share”, and mortgage-backed is, well, obvious.
Anyway, what the BBC have just announced is that the Bank of England are going to, effectively, buy up a bunch of these mortgage backed securities, by issuing bonds (promises by the Government to pay interest, which are generally held a lot less likely to default than similar promises by individual home-owners or property investors.)

The details haven’t been announced – it’s possible the government will sell off these bonds, and then use the cash to buy up mortgage-backed securities… but more likely is that the Bank of England will simply offer to either swap the bonds for the securities (at some discounted rate), or offer a limited-period swap, where the banks have to take the securities back in X months/years time.

The problem is, of course, that while Base Rates are low, a lot of lenders simply haven’t got the cash to lend… because they have mortgage backed securities to sell, and no-one’s buying

Expect two things:

  1. A lot of people calling to “protect the taxpayer”
  2. A lot of press speculation about this, and no agreement as to whether it’s too little, too late, or too much and a big risk to all of us.

The over-riding issue, as ever, is that the government will figure out that most people don’t care about the national debt… but do care about whether they can get the mortgage they need to move house. The national debt (what the government will, one day, have to pay out) is something that our children can inherit 🙂

Of course, it’s possible that this may turn out to be a really good move – and the government, by doing this, may end up buying a lot of MBSs that go up fast in value if a slump can be avoided. And make no mistake, the key driver for the current slump is lack of lenders… not a lack of people who’d like to be buyers.

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US Interest rates cut AGAIN

Posted by Mark Harrison on January 30, 2008

Nine days ago, the US Federal reserve cut US interest rates by .75%.

Since then, I’ve been increasingly concerned about it – it DIDN’T feel like a sensible response – it felt like a knee-jerk reaction to stock market problems the day before – It wasn’t at their regular meeting, but at an emergency session of the FOMC (the US equivalent to the Bank of England’s MPC.)

They’ve just announced, at their normal meeting, that they are cutting US interest rates by a further .5%, down from 3.5% to 3.0%.

The rationale, this time round, seems to have been that the US Q4 economic growth figures were lower than expected. This may well be true… but the US Q3 economic growth figures were much HIGHER, so overall the second half of 2007 panned out pretty much on target for them.

While I’ve written before about why it’s a bad idea to second-guess the Bank of England, this has got to increase the pressure on them to move UK interest rates down a little to. Most analysts, and most traders are assuming that the BoE will bring rates down in February (by .25%) and later in the year, probably twice.

Hopefully good news for those UK people who will see their mortgage payments fall. (Variable rate mortgages are far more common here than in the US.)

And very good news for UK investors looking to buy in the States at the moment 🙂

Whether lower base rates will turn into lower fixed-rates, or lower short-term discounted mortgages for UK investors is another question though – while some rates are lower, banks are a lot less willing to lend to anyone even vaguely borderline.

Posted in Overseas property, Property Investment | Tagged: , , , | 3 Comments »

Needed: Big book with the words “DON’T PANIC” printed in friendly type on the cover

Posted by Mark Harrison on January 23, 2008

UK readers “of a certain age” will no doubt remember the book of which I’m talking, but if ever there were a need for the cover, it is now.

The BBC’s Robert Peston has provided a summary of a speech by Mervyn King, the Governor of the Bank of England.

As Mr. Peston says:

Mervyn King said that central banks could not fix the fundamental problems in money markets

A quick recap of what happened:

  • For several years, US banks have been lending mortgages in a fairly cavalier manner (translation: in a way that would certainly be illegal under UK rules)
  • They did this because they could “sell on” the mortgage debt, and make a profit not only by selling it on, but by providing on-going “processing services”
  • This happened to a much, much smaller extent in the UK, where this type of transaction was dominated by Northern Rock
  • Towards the end of last year, the number of people with deep pockets wiling to buy this mortgage debt got small. (The problem was ACTUALLY that a small number of huge banks got worried about their own cash reserves, and decided to stop spending for a month or two.)
  • Because of this, some of the banks that had been assuming they could sell on the debt suddenly couldn’t. One of these (and the biggest in the UK) was Northern Rock, which went to the Bank of England asking to borrow a lot of money.
  • Word of this got out, there was confusion about what was happening, and queues formed in the streets of people wishing to withdraw their savings from NR (despite the fact that, in most cases, these were covered by the UK’s Financial Services Compensation Scheme anyway.)

Despite Mr. King’s words of warning (and let us not forget that he tries to use speeches to STOP problems happening), I’m not worried for UK property investors.
In fact, so far in January, some of the US “backers” have gone through their accounts, realised that their cash position wasn’t as bad as they’d feared, and started buying again. (Their concern was never that they’d run out of cash, merely that they’d let their cash levels get lower than the levels required by a complex formula enforced by the US goverment.)
However, it’s clear that some lenders in the are still running scared.Overall, though, things are actually looking UP for property investors (in a bizarre kind of way.)

  • UK Interest rates went down in December.
  • Most analysts believe they’ll go down again next month… and in the middle of the year… and towards the end of the year, so finish about .75% lower than they are today.
  • One of the scarey statistics – the so-called “BaseRate to LIBOR spread” (see my report at the end of November) has actually got rather better in the last six weeks.

At the moment, it’s possible that one of three things will happen:

  1. Interest rates will come down OR
  2. House prices will come down OR
  3. Both

Now, why would those be bad for investors expecting to buy rather than sell over the next year?

And, may I remind you, in the last survey (which was, to be fair, in August last year, just before the NR stuff), a staggering 83.6% of investors said they expected to buy in the next 12 months, 14.3% said they’d hold, and only 2.1% said they’d sell.

Of course, if your whole strategy has been to “buy gifted deposit offplan flats in the hope that the market goes up, and don’t worry that there’s a shortfall between the rent and the mortgage”, then maybe the words “DON’T PANIC” aren’t appropriate!

Posted in Northern Rock, Property Investment | Tagged: , , , | Leave a Comment »

Energy prices up, house prices down -> Bank rates stay flat

Posted by Mark Harrison on January 10, 2008

Viewpoint 1: The Central Bankers are going to be earning their money this year.

Viewpoint 2: The economy may as well be run by Roly Mo from the Fimbles for all the difference the BoE’s going to be able to make this year.

Yup – stagflation seems to be with us. Prices are going up, but consumption’s going down. Whichver way the MPC move interest rates, some part of the economy is going to get badly harmed.

Today’s decision? Do nothing. UK base rates remain at 5.5%

Posted in Economics, Property Investment | Tagged: , | 1 Comment »

UK house prices in “going up in December shock”

Posted by Mark Harrison on January 9, 2008

According to a report in the Motley Fool, average house prices went up 1.3% in December, having gone down in September, October and November.

The fool are quick to point out that most analysts see this as a temporary blip, rather than a turn-around.

With the Bank of England’s Monetary Policy Committee due to have its monthly rates meeting tomorrow, this survey probably means that it’s less likely we’ll see a rates cut.

That having been said, the economy is still in poor shape – retail figures in December were the worst for three years expect for food, with DSG (Currys and PC World) having issued a profits warning, and Next also talking about a poor December. On the flip side, Waitrose’s sales were up 28.5%!

Back in June 2006, I wrote an article about how the BoE actually sets interest rates, and what this means for property investors.

At the time, my conclusion was:

However, if your IFA tells you that they KNOW that interest rates are GOING TO GO UP (or, for that matter, down), then I would suggest that you run away, fast.

Were I writing the article today, I’d probably make one change… The word “UP” would become “DOWN”.

Posted in Economics, Property Investment | Tagged: , , | 1 Comment »

Central Banks and strange games

Posted by Mark Harrison on December 13, 2007

I’m still trying to work out the meaning of what happened yesterday. Let’s start with a quick summary of the facts:

A group of Central Banks (who are part bankers and part civil servants), led, but the US Federal Reserve, and including the Bank of England, the European Central Bank (which is the central bank for the EU), plus the central banks in Switzerland and Canada made a joint move.

They each announced that they will be providing Billions of pounds ( or dollars / euros / whatever) in loans to banks… basically to try to prevent “another Northern Rock.”

Basically, the concern was that, even though the base rates had been cut, the actual rates banks were charging their customers weren’t coming down as fast, because banks were borrowing from each other at rates quite a lot higher than the base rates. I wrote about this in the UK in this article a couple of weeks ago, and the Wall Street Journal picked up on the story yesterday.

This move by the banks is clearly a response to the problem – the fact that the central banks and the markets are telling very different stories.

On the one hand, this is good. Central Banks are stepping in, as a group, to try to prevent further bank runs.

On the other hand, this is very, very, very, bad. Central Banks need to step in, as a group, to try to prevent further bank runs.

Key learning – the economy is NOT acting like it has in the period since the second world war – the economy is acting in ways last seen in the 1920s-1930s. Not even the LTCM crisis a few years back prompted this kind of action.

Posted in Economics, Property Investment | Tagged: , , , | 1 Comment »

Bank of England – base rates down 1/4 %

Posted by Mark Harrison on December 7, 2007

Yesterday, the Bank of England monetary policy committee cut its base rate by .25%.

It’s already been reported that the larger domestic (ie – NOT buy to let) lenders are going to pass on this rate cut in full (which, frankly, I’d have been appalled if they didn’t.)

However, for those borrowers, particularly Buy To Let borrowers, whose mortgages are tied to LIBOR rather than the base rate, the news isn’t so good.

The markets are still making money very expensive, so the lenders who are re-borrowing the money they lend as mortgages on the open market are still finding this a lot harder.

I’m getting increasingly concerned about the UK economy next year – over the last few years, I’ve held off making predictions, but I think we’re in for a rocky time, and “effective repossessions” will be up.

What do I mean by “effective repossession” – it’s a (not very good) term I’ve coined to mean ACTUAL repossessions PLUS “distress sales to avoid repossession.” If more and more people are selling their houses at 20% below open market value, in exchange for a rapid sale, to avoid repossession, and the investor market has got a lot better at buying these things, rather than letting the lenders repossess, does it REALLY mean that repossessions are down?

Posted in Below Market Value, Property Investment | Tagged: , , , | 2 Comments »