Negotiation, Negotiation, Negotiation

UK Property Investment news and comments from Mark Harrison of YourPropertyExpert.com

Posts Tagged ‘Interest Rates’

UK Interest rates are basically being kept down by hope…

Posted by markharrison on June 19, 2008

There’s a lot of debate raging in the blogosphere at the moment about where interest rates should be.

Some of the arguments are, (like this one by William Buiter of the FT) to put it mildly, very technical.

Basically, though, there are two schools of though:

  1. We should set interest rates based on what we know about the present
  2. We should set interest rates based on what we believe about the future

There is something called the Taylor Rule (see here) which is broadly accepted by economists as “what you should do if you want to base your decisions on the present”.

Now for the bad news – if we apply the Rule to the UK, we see that Base Rates should go up to about 7% – which would imply that investors were paying about 8.5% for their mortgages, and home-owners a little less.
However, the Bank of England clearly don’t want to do this – because (among other things) of the knock-on effect it would have on the cash-flow of most of the UK’s working population. Instead, they are basing their interest rates on the Treasury’s predictions of the future…

… which is to say that 2008 will be a ghastly year for, well, everyone… but that 2009 will be a lot better, with rates being a bit LOWER than they are now.

Here’s hoping!

I find it interesting that the fact that you have to pay a LOT more than the base rate to get a mortgage actually suggests that the “markets” believe that rates should be higher than they are now (and the jump to fixed rates suggests that the markets believe that rates will go higher.)

Photo copyright Katie Tegtmeyer – used under a Creative Commons licence.

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

Posted by markharrison 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 YourPropertyExpert.com 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!

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