Friday, 6 March 2015

Seems like a strange thing to be boasting about.

From The Telegraph:

David Cameron said that a future Conservative government will "keep mortgage rates low" so that homeowners can "go to bed with real peace of mind". The Prime Minister said that maintaining low borrowing costs would be the first priority of the Conservative's housing policy.

He attributed Britain's historically low interest rates of 0.5 per cent, set independently by the Bank of England, to the Government's deficit reduction program...

"When confidence falls, mortgage rates can spiral, homes become unaffordable, and families risk losing the roof over their heads. That was the risk Britain faced in the last recession. But this Government came to office set in place a long-term economic plan and showed the world we were managing our economy and as a result, mortgage rates have stayed very low..."

He said that a family with a £120,000, five-year fixed rate mortgage are spending £155 a month less than they would have been in 2010.

"This has made a real difference to families across our country. Instead of couples having agonised conversations about the mortgage payments late into the night, people are going to bed with real peace of mind because our long-term economic plan is working."

Notwithstanding that...

a) What's good for borrowers is bad for savers.

b) The current low interest rate environment is a global, long term trend. If anything, the 1970s and 1980s are looking more and more like a blip and what we have today is pretty close to 'normal'.

c) Low interest rates could be a result of weak economic activity as much as sensible economic management.

d) The Lib-Cons have reduced the annual deficit slightly, but have managed to nearly double the overall accumulated national debt since 2010; and it is the overall national debt which influences interest rates.

e) The absolute level of interest rates is nigh irrelevant, all that matters is changes. Once you have taken out a mortgage, clearly you benefit if rates go down; if you have savings you lose income; and if you want to buy a home in the near future you gain nothing because house prices rise inversely with interest rate falls. If you are saving up for a deposit, you are running to stand still at best.

f) What about the 'peace of mind' that job security, economic growth, a decent welfare system etc could provide? So what if people are 'saving' £155 a month in interest relative to 2010, if real wages had increased by their long term average of about 2% or 3%, then the average household would have gained a lot more than £155 a month.


Bayard said...

"because our long-term economic plan is working."

We all know what the Tories' long-term economic plan is vis-a-vis land and housing is and yes, it's working just fine.

paulc156 said...

Agree with that mostly but just one query.You say that only absolute debt levels matter to interest rates rather than deficit levels. Yet both in the UK and US along with Japan have seen absolute debt levels rise enormously whilst interest rates have remained flat or fallen. Obviously zero debt is preferable to any debt as far as a lender is concerned but huge levels of debt in of themselves are not relevant in the real world where there are no such borrowers! Whereas large and increasing deficits imply some problematic issues of fiscal management unless once again all similar economies are experiencing the same phenomenon. So really debt levels only matter where countries are bucking the trend. ie;increasing debt levels whilst others are reducing them.

Rich Tee said...

Interest rates are the lowest for 300 years which does suggest that current low rates are abnormal.

However, I have heard it said that we should get used to it because Western productivity has peaked and is now falling, so bank deposits can no longer earn the returns they used to. It's probably worth planning on the assumption that they will stay low for the rest of my life (but maybe not as low as at present). At least then for a saver any rise will be a nice surprise.

I feel bad for the people who saved long term on the assumption that interest rates would stay up though.

L fairfax said...

Isn't there a theory that low interest rates encourages bad investments so are a bad thing?

Dinero said...

> Paul156

there are lots of things to consider
The aggrgate debt level, GDP , The BoE open market operations, the depth of the bond market, inflation expectations and considerations, the length of time between net payments to the bond market, the availabilaty of safe credit assets,the demand for credit,crowding out effect, the supply and issue of government bonds,monetary quantitive effects, and economic activity.

Mark Wadsworth said...

B, yes it is.

PC, do some regression analysis. Overall total govt debt has a lot of impact on interest rates; the odd bad year of deficit does not. Don't just pluck ideas out of the air without backup.

For sure, if Country X has run up current deficits of 5% of GDP for the last ten years and whose national debt has gone up from 0% to 50% of GDP, it will be looked at less favourably than Country Y which has run surpluses of 2% for the last ten years and has got national debt down from 70% of GDP to 50% of GDP, but that is because investors look a few years into the future as to what likely debt levels will be in five or ten years' time.

RT, OK agreed, current interest rates are a bit lower than "normal" but not massively. The high inflation, high interest rate environment of the 1970s and 1980s was a blip.

LF, yes there is and they do - the whole point from the Homeys' point of view is to inflate land prices (and the price of other interest rate sensitive 'assets' ) as high as possible.

But remember the golden rule - if the price of something fluctuates inversely to interest rates - it is not "capital" in the real sense of the world, it is a monopoly right.

mombers said...

How exactly do low mortgage rates help Londoners? 55% rent and as we know, rents are not affected by interest rates. All it's meant is that more renters are condemned to paying rent forever as house prices spiral ever upwards.

Bayard said...

"condemned to paying rent"

Ah, the meme of the tenant as second class citizen and failed wannabe homeowner rears its ugly head again.

For a large proportion of tenants, it's only a condemnation because they are excluded from the magic money tree that housing has been these last 30 odd years.

Mark Wadsworth said...

M yes, good point.

B, oh come off it, it's not just Homey propaganda. Snobbery aside, it is a much nicer feeling owning your own home instead of renting.

Rich Tee said...

The main problem with being a tenant in Britain is lack of security. The legal system does not offer any long term contract option, for example, and the banks would oppose that anyway because it would make it more difficult for them to throw a tenant out when they re-posess a property from a bankrupt Buy-to-Let "investor".

Bayard said...

"B, oh come off it, it's not just Homey propaganda."

Certainly I'd agree that the appreciation of the advantages of being a homeowner is not just Homey propaganda, but the idea that tenancy is always a second best option, that no-one rents out of choice and that all tenants are people who are "condemned" to rent rather than doing what they wanted to, which is to buy, that is a recent meme and a very Homey one at that.

When I got my first job I, and all my contemporaries generally looked to rent somewhere to live, unless they were already married or as good as, as they knew they probably wouldn't be there long and would most likely get married, move jobs, get transferred etc with a few years. Now the young people I know who are at that stage in life tell me that they are renting because they can't afford to buy somewhere. I really don't think that someone like mombers would be talking about tenants being "condemned" to rent thirty years ago.

"The legal system does not offer any long term contract option,"

Oh yes it does, it's just that landlords, unsurprisingly, tend to use the one that offers the least security to the tenant so as not to be landed with a bad tenant and all the hassle of getting them out. The usual six-month tenancies on offer today don't, as you say, offer enough security, but that is probably because their predecessors, under the Rent Act, offered too much.

Rich Tee said...

"Oh yes it does"

So go on. Tell me what the English law long term tenancy contract option is called legally.

Note: informal agreements do not count because they are not legally binding. Also, if a tenant and a landlord sign a document agreeing to a long term tenancy its enforceability is dubious, because the only option either party has if the one party breaks it is the standard breach of contract law that applies to everything.

Mark Wadsworth said...

B, for sure, in the Good Old Days you'd start uni or get your first job and rent for a few years (at rent controlled rents) but then after a few years you'd get sick of it, settle down and buy your own home.

It's a question of degree, If out of your adult life of average sixty year, you rent for three or four out of convenience at a rent controlled rent, that's fine, but if you have to pay 'market rent' for twenty years, then that is shit.

Especially as people tend to look down on you if you are older than thirty and still renting. I've experienced this myself, it's most unpleasant.

And - as anybody who bought the home they had been renting will confirm - for a given home, owning is simply nicer than renting.

Either way, in an ideal world (i.e. the good old days) with plenty of social housing, LVT and rent controls, it would all sort itself out very quickly.

Bayard said...

"and rent for a few years (at rent controlled rents)"

These had largely gone by the early 80s, but there was still not much stigma about renting.

"Especially as people tend to look down on you if you are older than thirty and still renting."

Yup, that's what's new. My father first bought a house when he was 36. I shall have to ask him if he ever felt looked down upon.

Bayard said...

"So go on. Tell me what the English law long term tenancy contract option is called legally."

It's called a lease with a high ground rent.

Mark Wadsworth said...

B: "These had largely gone by the early 80s,"

You are a couple of years older than I am, infuriatingly right about minor details and I f-ed off abroad in 1984 and didn't come back until Thatcher was safely disposed of, so I really don't know what happened in between.

But as far as I am aware, renting was very cheap in the early 1980s and was still affordable until round about the Housing Act 1988, and even then it took five or ten years before landlords realised what they could get away with.

When I came back to London in 1993, renting was not exorbitant or anything.

paulc156 said...

@MW "Overall total govt debt has a lot of impact on interest rates"

The UK has seen consistently lower rates since the early 80's to date even whilst adding to national debt in the vast majority of years and in recent years by an accelerating amount. See BoE page 280 chart 8:

We can say the same for the US and Japan and a host of others.

SWL posts an article just today discussing this very point. The effects of very high levels of national debt. He concludes that the interest rate setters [markets]would be unlikely to penalise high debt levels under the current circumstances:

Mark Wadsworth said...

PC, I'm not sure if you are agreeing or disagreeing with my original statement

"The current low interest rate environment is a global, long term trend."

paulc156 said...

That's self evidently correct. No I'm really just questioning this:

"The Lib-Cons have reduced the annual deficit slightly, but have managed to nearly double the overall accumulated national debt since 2010; and it is the overall national debt which influences interest rates."

We've doubled the national debt over 5 years but the markets haven't reacted. Any influence the debt has is apparently swamped by other factors [eg;long term trends] and stuff as Dinero implied in his response above. This is similar ground that Rogoff was embroiled in in his paper which claimed something deleterious happens when debt levels go above 90%/GDP. ie;to growth.

Now it seems that "differences in average GDP growth in the categories 30-60 percent, 60-90 percent, and 90-120 percent cannot be statistically distinguished" according to a report by Herndon, Ash, and Pollin. So I'm presuming that differences in interest rates for similarly varied debt/GDP levels would also be statistically indistinguishable.

Basically as the following link indicates, if a country has it's own currency there is no positive significant/distinguishable relationship between debt levels and interest rates. You can draw your own regression line in if you like, though it would be superfluous since the relationship is clearly not there.


Bayard said...

"renting was very cheap in the early 1980s"

From what I recall from my student days, if you were lucky enough to find somewhere to rent where the rent had been set by the council, as they were empowered to do in those days, rents were very cheap. However, those places were like hen's teeth (a friend of mine lived in one, lucky bastard). More often, the rent was an informal agreement between you and the landlord and you didn't have the protection of the Rent Act. It wasn't the done thing to grass your landlord up, unless they were really taking the piss, as this invariably resulted in the house being put on the market at the end of the academic year. Presumably the landlord then bought somewhere else.

Mark Wadsworth said...

Paul: "if a country has it's own currency there is no positive significant/distinguishable relationship between debt levels and interest rates. "

The regression I did was for all Eurozone countries for two sample years in the years prior to the "financial crisis" and there was a very clear correlation between overall debt levels and interest rates in both years.

It's still there but much flattened i.e. netherlands pays the lowest rates and Greece the highest.

But for countries with their completely own currency which doesn't care too much about exchange rate fluctuations it is very difficult to point out a long run trend.

Clearly, if the correlation held at all times, then interest rates would be steadily going up in USA, UK, Japan and so on, which they clearly are not.

Quite why this is is a mystery to me, but it clearly "is" whether we understand it or not.

B, OK, not "very very cheap" but at least "not unreasonable".

The advantage of being a tenant was only if you stayed somewhere long term because landlords couldn't increase rents much. But there was less of an advantage to people who only stayed somewhere for a year.

Either way, by the early 1990s, fewer than 10% of households were renting privately, down from 90% in 1900.

Random said...

True, the key issue here is currency sovereignty.

Mark Wadsworth said...

R, I have pointed out elsewhere that a prerequisite of high price inflation seems to be currency controls of one sort or another (a currency peg, or limits on amounts to be exchanged or split rates or any other nonsense).

Why this is I do not know. But it clearly "is".

Bayard said...

"Why this is I do not know. But it clearly "is".

Another conundrum I have thought of after reading these comments:

Rents are set by what potential tenants can afford to pay (Ricardo). House (land) prices are set by what potential buyers can afford to borrow (hence the relationship between interest rates and land prices). However, land prices are also set by the rent the buyer saves by buying (most pointedly when a tenant buys his landlord out) and when interest rates fall, land prices go up without a corresponding increase in rents, as potential tenants' income will be unaffected by interest rates. So which of my postulates is wrong?

Dinero said...

The rent on a rented house and the monthly interest on a mortgage for the same house are the same figure ,the interest rate changes the capitilised value of the monthly interest payments.

Mark Wadsworth said...

B, as Din suggests, none of them.

"Rents are the Maypole around which house prices dance", (c) me.

Non-owner needs somewhere to live, is willing to pay £10,000 a year to occupy Home X.

If the rent is £10,000, he is happy renting.

If the mortgage repayments are £10,000, he is happy buying.

By and large and in the grander scheme of things, the rental value of Home X is much the same as the mortgage repayments would be (easily observed equilibrium in the real world).

So if our non-owner is prepared to pay £10,000 a year mortgage repayments and the interest rate is 10%, he is happy to borrow/pay £100,000.

If the interest rate is 5%, he is happy to borrow/pay £200,0000 etc.

(The current owner of Home X does the same calculation in reverse, he is indifferent whether he collects £10,000 a year rent or sells the house, puts it in the bank and earns £10,000 a year interest).

Dinero said...

What about when people are prepaired to pay more on mortgage payments monthly than they are prepaired to pay in rent does that situation tell you anything.

Mark Wadsworth said...

Din, come off it. It is not at all times £ for £ exactly equal.

If people anticipate house price rises, they are prepared to pay more for a mortgage, as owners, they are bearing risk of expensive repairs, so will pay a bit less for a mortgage, they might expect interest rises or falls etc etc. Boring.

But the Halifax' figures are very similar for renting or buying.

It's not like e.g. buying a new or a second hand car, where there is a huge price differential.