Interest Rate Rise - a good idea ?

[johncrossley]

While the average wage was lower back then, how much was the average house? The average property price is about 9 times that of the average salary.

The hyping of property prices over the last few decades has been encouraged by the very low interest rates. Assets such as property and shares can rise in value to astronomical levels and can also dramatically fall simply on market sentiment. So you cannot argue that you should keep interest rates low to keep mortgage payments low. Buying a house is a speculative investment and involves risk, just like share investment. Keeping interest rates low artificially simply makes property even more unaffordable.

 

[Bletchleyite]

The hyping of property prices over the last few decades has been encouraged by the very low interest rates. Assets such as property and shares can rise in value to astronomical levels and can also dramatically fall simply on market sentiment. So you cannot argue that you should keep interest rates low to keep mortgage payments low. Buying a house is a speculative investment and involves risk, just like share investment. Keeping interest rates low artificially simply makes property even more unaffordable.

Buying a house is primarily a home to live in and shouldn't be a speculative investment in that way; the law and the market should be regulated for "primary residence" homes to protect people from unwanted bankruptcy and to enable this, unless we wish to transition to a rental culture, of course, which would require e.g. a much higher old age pension.

Decoupling the interest rate paid on residential mortgages (only; buy to let investors can do what they like) from the bank rate by way of very long term fixed rates is probably the way.

 

[Dai Corner]

While the average wage was lower back then, how much was the average house? The average property price is about 9 times that of the average salary.
How much was the cost of fuel, food, heating and general standard of living?

Comparing the average house price with the average salary ignores the fact that first time buyers usually buy the cheapest houses.

 

[Wynd]

Anyone putting their faith in economists to get this right, really needs to have a think about the last 20 years of economic management by the treasury and bank of england.

We have flat wages, a massive financial crisis, increasing wealth inequality, some of the lowest levels of productivity in the developed world due to minimal investment, and some think this is a good track record?

This bank have got this wrong. They know they cant control inflation, and evidently they arent telling us their full reasoning for doing this.

 

[gg1]

Comparing the average house price with the average salary ignores the fact that first time buyers usually buy the cheapest houses.

Not really, if average house prices are 9 times average salary now compared to 4.5 times 30 years ago, it stands to reason house at the bottom of the market have seen a similar proportional increase, ie people who 30 years ago could have afforded a home at the bottom of the market would no now be able to on the same salary adjusted for inflation.

As an example, the first time I seriously considered buying a home was in 2000 in the Erdington area of Birmingham. At the time I earned £11,000 PA (adjusted for inflation this is less than the current minimum wage) and 2 bed terraced houses (the cheapest houses on the market) were 40-45k so around 4 times my salary. A quick check on Rightmove now shows a price range of 140 to 160k, around 8 times the salary of someone on minimum wage.

 

[Dai Corner]

Anyone putting their faith in economists to get this right, really needs to have a think about the last 20 years of economic management by the treasury and bank of england.

We have flat wages, a massive financial crisis, increasing wealth inequality, some of the lowest levels of productivity in the developed world due to minimal investment, and some think this is a good track record?

This bank have got this wrong. They know they cant control inflation, and evidently they arent telling us their full reasoning for doing this.

How do you think inflation should be controlled?

 

[Bletchleyite]

They know they cant control inflation, and evidently they arent telling us their full reasoning for doing this.

Of course they can't control inflation that is largely caused by spiralling fuel and energy prices due to external factors. Why would anyone think they could? They are tweaking round the edges, though at some point rates do need to go up to a more stable level of around 5%.

This isn't conventional inflation which is caused by high demand for products and services, which is controlled by bumping interest rates up a bit so people are encouraged to save instead of spending for a bit.

 

[johncrossley]

Buying a house is primarily a home to live in and shouldn't be a speculative investment in that way

How do you plan to regulate house prices?

 

[Magdalia]

Of course they can't control inflation that is largely caused by spiralling fuel and energy prices due to external factors. Why would anyone think they could? They are tweaking round the edges, though at some point rates do need to go up to a more stable level of around 5%.

This isn't conventional inflation which is caused by high demand for products and services, which is controlled by bumping interest rates up a bit so people are encouraged to save instead of spending for a bit.

Some of UK inflation is external factors, particularly fuel and food.

But there is also a lot of domestic inflation caused by demand exceeding supply for products and particularly services, as demonstrated by the labour market. I pay four different people to deliver services for me at my home: all of them have raised prices significantly this year.

 

[Bletchleyite]

Some of UK inflation is external factors, particularly fuel and food.

But there is also a lot of domestic inflation caused by demand exceeding supply for products and particularly services, as demonstrated by the labour market. I pay four different people to deliver services for me at my home: all of them have raised prices significantly this year.

I would say that fuel/food inflation alongside house price increase are the main problem. The latter is secondary but is what the rate rise is intended to address in the usual manner. Prices of goods and services have had to rise as wages and fuel costs have, it's less to do with demand though it is partly that.

The problem is that peoples' budgets are now so tight that this will cause some to lose their homes, which is disastrous if it starts happening en-masse as it did in the 80s.

 

[Magdalia]

The problem is that peoples' budgets are now so tight that this will cause some to lose their homes, which is disastrous if it starts happening en-masse as it did in the 80s.

Absolutely, but that's a matter for fiscal policy and other policies set by the Government. It isn't a matter for the Bank of England setting monetary policy.

 

[Dai Corner]

The problem is that peoples' budgets are now so tight that this will cause some to lose their homes, which is disastrous if it starts happening en-masse as it did in the 80s.

Clearly not everyone's budget is tight if

But there is also a lot of domestic inflation caused by demand exceeding supply for products and particularly services,

 

[Bletchleyite]

Clearly not everyone's budget is tight if

It's probably true that the divide is widing. London commuters who no longer commute but are on the same wage suddenly have £500 a month or so more to spend - that's pretty massive. But poor people are being whacked hard into destitution - food banks are a symptom.

 

[yorksrob]

Consumers' expenditure is a big part of GDP, but there is also business investment, government expenditure and net exports.

In the UK there are big disadvantages in trying to boost the economy by boosting consumers' expenditure. One is that a lot of it leaks out of the UK because the spending is on imported goods, the economy that benefits is China not ours. Another is that a lot of it leaks out into asset price inflation particularly houses. Even if the boost goes into domestic goods and services, there's no growth if the suppliers of those goods and services just raise prices, and that's what is likely to happen because they can't get the staff.

Unfortunately without consumer spending, we're not left with much of an economy anyway. Remember, we're not even talking about boosting consumer spending, we're talking about maintaining the spending we've got.

If we are importing too much (and we probably are) we need to be finding a different policy lever to reduce imports than crashing the consumer economy including the various service industries that don't rely on imports.

But most borrowers are paying interest rates that are a lot less than the rate of inflation. The base rate is just a benchmark of the interest rate that the Bank of England pays to commercial banks.

If a householder is paying a huge increase in inflation on top of a smaller interest payment, the comparison between the two is fairly academic.

 

[Bletchleyite]

If a householder is paying a huge increase in inflation on top of a smaller interest payment, the comparison between the two is fairly academic.

Inflation makes your mortgage smaller (in real terms), not bigger. Provided they can meet the added interest (or if they can't, provided they're young enough to remortgage to a longer loan) it will mean the money they have outstanding on their loan will be in real-terms smaller and make negative equity less likely. Plus, if the actual number of house prices stays the same or increases by less than 10%, that's de-facto reducing house prices which is what we want to happen.

Inflation isn't great for lots of other things, but one thing it is good for is allowing a real terms house price correction without making anyone destitute.

 

[yorksrob]

Of course they can't control inflation that is largely caused by spiralling fuel and energy prices due to external factors. Why would anyone think they could? They are tweaking round the edges, though at some point rates do need to go up to a more stable level of around 5%.

This isn't conventional inflation which is caused by high demand for products and services, which is controlled by bumping interest rates up a bit so people are encouraged to save instead of spending for a bit.

They're like generals fighting the last war rather than the current one.

 

[Magdalia]

It's probably true that the divide is widing. London commuters who no longer commute but are on the same wage suddenly have £500 a month or so more to spend - that's pretty massive. But poor people are being whacked hard into destitution - food banks are a symptom.

A lot of economic policy is based on things being normally distributed: the bell curve with thin tails of very poor people and very rich people, and a big bulge in the middle containing what politicians love to refer to as "hard working families".

But the economy hasn't actually worked that way for a long time, going back to financial deregulation in the 1980s. Now it is like there are two teams, who I call the green team and the red team.

The green team have more income than expenditure, and are saving, or, if they don't have more income than expenditure, they still have easy access to credit. People in the green team have the green light to carry on spending, whatever the Bank of England do to interest rates, and whatever the government do to taxes.

The red team, on the other hand, are those with more expenditure than income, and are getting deeper into debt, or have lost all access to credit. Every pound of income, and every change in prices, affects what they can afford, and how they live their lives. The red team are getting whacked from all directions, and they have the red light to stop spending. Food banks are indeed a symptom of this.

Sadly, it is quite common for people to lose their place in the green team, and end up in the red team. This can be due to losing their job or their health, or some traumatic event. On the other hand, once in the red team, it is very hard to get back into the green team.

There's little evidence that many economists and policymakers grasp any of this.

They're like generals fighting the last war rather than the current one.

 

[yorksrob]

But there is also a lot of domestic inflation caused by demand exceeding supply for products and particularly services, as demonstrated by the labour market. I pay four different people to deliver services for me at my home: all of them have raised prices significantly this year.

The interesting question is whether that is due to too much demand, or is it more because they're passing on the external inflation factors that we're all experiencing !

I suspect far more of the latter.

 

[Wynd]

indeed. Yet according to some it appears that all the world‘s finest economists are wrong.

They are, why cant you accept it?

As Her Maj said after the 2008 banking crisis, why did nobody see it coming?

Actually in 2008 there were 3 people who saw it coming: Vince Cable, Gillian Tett and someone else I've forgotten. Most of the world's finest economists did not see it coming.

In the aftermath of the 2008 banking crisis, very few of the world's finest economists worked out that quantitative easing would create an asset price bubble without feeding through into the real economy. Neither did they foresee that, having created an asset price bubble, quantitative tightening would lead to an asset price crash, which is why they have never dared to do it.

A year ago the finest economists in the Bank of England had a 4% inflation forecast.

The world's finest economists are doing fine.

Many people saw it coming, watch The Big Short.

A lot of economic policy is based on things being normally distributed: the bell curve with thin tails of very poor people and very rich people, and a big bulge in the middle containing what politicians love to refer to as "hard working families".

But the economy hasn't actually worked that way for a long time, going back to financial deregulation in the 1980s. Now it is like there are two teams, who I call the green team and the red team.

The green team have more income than expenditure, and are saving, or, if they don't have more income than expenditure, they still have easy access to credit. People in the green team have the green light to carry on spending, whatever the Bank of England do to interest rates, and whatever the government do to taxes.

The red team, on the other hand, are those with more expenditure than income, and are getting deeper into debt, or have lost all access to credit. Every pound of income, and every change in prices, affects what they can afford, and how they live their lives. The red team are getting whacked from all directions, and they have the red light to stop spending. Food banks are indeed a symptom of this.

Sadly, it is quite common for people to lose their place in the green team, and end up in the red team. This can be due to losing their job or their health, or some traumatic event. On the other hand, once in the red team, it is very hard to get back into the green team.

There's little evidence that many economists and policymakers grasp any of this.

Bingo. This is spot on. Its similar to what Murphey is saying, those with cash and assets, fine, those without, totally nailed by this move.

 

[Bletchleyite]

Bingo. This is spot on. Its similar to what Murphey is saying, those with cash and assets, fine, those without, totally nailed by this move.

As a homeowner with a fair bit of financial slack it's only annoying to me. I could handle rates at 10+ per cent a la 1980s if needs be (not happening, to be fair) though I'd have to stop most discretionary spending entirely, which is somewhat "diddums" and I don't expect any sympathy if I did.

However, it could mean destitution for people closer to the breadline (including renters, whose landlords will whack up the rent as their mortgages increase) - typically families, where ending up on the streets is of far more overall consequence than if I as a single bloke did - and that's not OK.

 

[Dai Corner]

As a member of the Green Team I'm not sure whether I should spend more, especially from my savings which I see shrinking in value every month, to help the Red Team earn more and keep their heads above water or spend less to reduce demand and ease the pressure on inflation!

 

[Bletchleyite]

As a member of the Green Team I'm not sure whether I should spend more, especially from my savings which I see shrinking in value every month, to help the Red Team earn more and keep their heads above water or spend less to reduce demand and ease the pressure on inflation!

Donations to food banks and homeless charities are probably one thing the Green Team could very usefully do at the moment.

 

[Wynd]

Im not sure exactly where the dividing line is between red and green team, but id wager its between the 6th and 7th decile.

 

[Dai Corner]

Donations to food banks and homeless charities are probably one thing the Green Team could very usefully do at the moment.

Good point. I do, in fact, make a monthly monetary donation to a food bank.

 

[Magdalia]

Unfortunately without consumer spending, we're not left with much of an economy anyway. Remember, we're not even talking about boosting consumer spending, we're talking about maintaining the spending we've got.

If we are importing too much (and we probably are) we need to be finding a different policy lever to reduce imports than crashing the consumer economy including the various service industries that don't rely on imports.

That's not correct. Business and government investment are critical, and, for decades the UK has not done enough of either. There's a huge opportunity now for investment to improve fuel and food security, build new capacity in health and social care, deliver net zero carbon emissions, and do mitigations on the climate change that's already baked in, to give just a few examples.

But, referring to my earlier post, consumer spending by the red team needs to be supported, without splurging any money on the green team.

 

[JamesT]

Does that make him wrong?

If you read Tim Worstall, he often points out times when Richard Murphy gets basic economics wrong. (E.g. Murphy has suggested a fix for our current inflation crisis… is to print more money.)
Now Worstall works for the Adam Smith Institute and appears to have a particular axe to grind with Murphy, but the points he makes seem to accord with my recollections of economics from school.

 

[Dai Corner]

But, referring to my earlier post, consumer spending by the red team needs to be supported, without splurging any money on the green team.

I suppose that's what the cost of living payments to benefit recipients are intended to do, and the money towards energy bills fails to do.

 

[Wynd]

If you read Tim Worstall, he often points out times when Richard Murphy gets basic economics wrong. (E.g. Murphy has suggested a fix for our current inflation crisis… is to print more money.)
Now Worstall works for the Adam Smith Institute and appears to have a particular axe to grind with Murphy, but the points he makes seem to accord with my recollections of economics from school.

Murphy is 90% of the way there, but the last bit is where he mis-steps.

The fundamental problem is this.

If you have assets, you receive income and you get richer.

if you dont, you pay and you get progressively poorer.

So, any policy that targets everyone who borrows indiscriminately, without appreciating the fact that many are already struggling, whilst refusing to tax those with assets and financial income, is fundamentally incorrect.

Yes, this is the nature of capitalism, but that doesnt mean that the government and boe need to exacerbate that nature.

 

[Dai Corner]

Murphy is 90% of the way there, but the last bit is where he mis-steps.

The fundamental problem is this.

If you have assets, you receive income and you get richer.

if you dont, you pay and you get progressively poorer.

So, any policy that targets everyone who borrows indiscriminately, without appreciating the fact that many are already struggling, whilst refusing to tax those with assets and financial income, is fundamentally incorrect.

Yes, this is the nature of capitalism, but that doesnt mean that the government and boe need to exacerbate that nature.

Not true. I came into this world with no assets, have inherited about £5000 during my lifetime yet have a net worth in six figures. Before anyone mentions house price inflation, I'd still be worth over £100k if there hadn't been any since I bought my first property.

 

[Giugiaro]

Buying a house is a speculative investment and involves risk, just like share investment.

Buying a house is primarily a home to live in and shouldn't be a speculative investment in that way;

*sigh* here we go again.

The idea of treating everything as a speculative investment brought us into this.

The rich can acquire and sell these "assets". As many as they want. It's optional if they'll enjoy them or let others do so for rent. What matters is the value and if it retains or increases with time.

Some people probably already treat scale model trains as jewellery, leave them stored somewhere, and then sell them twice or thrice the original MSRP. More if the models they're selling are "rare".
Were they enjoyed as toys?
Why should they? The act of unboxing already slashes the potential resell value, so why bother!?

Those who can't afford to play the asset game don't even get to enjoy things, even if they desperately need them! And with income from savings becoming completely irrelevant, all we have left is to treat everything as a service. Simply a perpetual state of "now".

You pay rent to live. You pay a contract for a car through a leasing company. You play games on a console provided to you as a service that the studio/manufacturer can take away from you at any time. You watch TV with a subscription fee. And you use a phone that's part of a telecommunications plan.

And if that "now" suddenly can't afford your way of life... well... too bad!