Abandon All Fear

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Archive for June 2nd, 2007

[Housing Market Myths] Low Interest Rates Means I Pay Less

Posted by Lex Fear on June 2, 2007

This Post Is Rated: M for Midly Offensive. Discussion of house prices which may cause home-owners to scoff or worry. Some people my be offended by my accusations.

Previously: Prelude, House Prices Always Rise

In the previous Housing Market Myths post, I presented facts, figures and observations proving that house prices do not always rise, and in fact overall house prices rise in cycles or peaks and troughs as it were.

I am now going to demonstrate practically why low interest rates have been bad for the economy, home owners and naive or amateur investors.

The last property crash in the UK saw interest rates rise to record levels of up to 15.40% (1 Mar 1990 – AWD Moneyextra). Despite many bankruptcies and repossessions, high rate was nothing new. Just has house prices have always spectacularly risen and spectacularly fallen, so have interest rates in the UK:

  • 5.50% 2007
  • 3.50% 2003
  • 6.00% 2000
  • 5.13% 1994
  • 14.88% 1989
  • 7.38% 1988
  • 13.88% 1985
  • 8.05% 1984
  • 15.13% 1981
  • 5.00% 1977
  • 15% 1976
  • 9.75% 1975
  • Source: Bank of England

UK Interest rates, as can plainly be seen, hit their low in 2003, anyone who bought in 2003 at the bottom will be feeling the heat of a 2.0% rise (over 50% increase in their interest payments) more than recent lemmings buyers. Not only that, the future does not look good according to recent news reports.

Regardless of whether the rates rise or not, it is important to realise the effects of low interest rates on the economy and especially on the psychology on average potential house buyers. I’m going to start by making an arrogant but informed blanket statement about people in the UK:

British people are absolutely crap at maths.

I say this because, if they were any good, we would not have the current situation where even key workers struggle to buy housing made for key workers let alone the rest of the population. The problem is the perception in the public and the media: low interest rate good, high interest rate bad.

Low Interest Rate, Good?

It’s easy to see where this perception comes from. If you’re going to take out a loan for £300,000 for 25 years at a rate of 5% then your monthly payment is going to be lower than the same deal at a 10% rate of interest. People see low rates, then they think to themselves “I can afford this”, so what happens is everyone rushes to get this loan. Thus the market is actually pushed up, as the stock gets lower, the prices go up.

This kind of bubble can be corrected easily: by raising interest rates, making the loans less attractive, which in turn lowers the price of the stock as demand falls.

Unfortunately, this is where the UK government (and specifically the current Chancellor of the Exchequer: Gordon Brown) and the MPC, have done recent homeowners a great injustice. Instead of taking control of house prices by raising interest rates before the prices went astronomical, Gordon pressed ahead with his unachievable 2% target and they continued to try and keep the base rate low. As more sheeple took advantage disadvantage of the lower rates, prices continued to spiral upwards, and more people were priced out. Those who have stretched themselves to the limit in borrowing leave themselves vulnerable to very small rate changes. As the interest rate creeps up half a percentage, they start to find themselves struggling to meet bills and basic necessities, until they bail out by declaring bankruptcy.

Low interest rates are not only bad for increasing the risk and level of personal debt, they are bad for savers. So even people who are financially astute are punished because they get little reward for their hard work.

Finally low interest rates and increasingly larger loan amounts have had a detrimental effect on Britain’s industries at home. More and more people have had to tighten their belts, which has meant that shopping has significantly lost appeal and supermarkets are reduced to selling crap whilst killing UK agriculture at the same time.

High Interest Rate, Bad?

It’s pretty clear that if interest rates ever hit 15% again, that many people are going to find themselves in a lot of trouble. But there are a number of groups that will benefit including:

  • Seasoned property investors (who will be able to buy at rock bottom prices)
  • Tenants (Who can still choose where to live, and can rent from the group above)
  • Savers (Those who have more in equity than they have in debt)
  • First time buyers (buying at rock bottom of the cycle)
  • Commercial industry (customers are be able to afford quality and luxury goods again)
  • Employees (higher wage increases)

Higher interest rates discourage borrowing and encourage saving. If less people are taking out mortgages, less people are seeking to buy housing. All it will take is a bit of seller panic to set in and it will drop like sack of potatoes. Even if sellers hold on, the market will stagnate before dropping more slowly whilst waiting for wages to catch up.

This is the maths part…

This section edited in red, thanks Emily (comments)!

Let’s imagine a house that is worth £300,000 at present.

  • You take out a 100% mortgage at a rate of 6% over 25 years
  • This gives you a monthly payment of £1,956.00
  • The total cost of your house is: £1956 * (12 * 25) = £586,800 (a 97% increase of original price)!

Now let’s imagine interest rates rise to 15%, bringing the value of the same property down to £100,000. If you took out the same 25 year deal your costs would be:

  • £100,000 at 15% for 25 years
  • Monthly payment of £1289.00
  • Total cost of your house: £1289 * (12 * 25) = £386,700 (a 287% increase BUT almost £200,000 less than the same property bought at £300k at 6% interest)!

Since you know you can afford the original £2000 monthly payment, we can actually lower the term for repayment of the original mortgage (which should be the objective, low house prices, smaller mortgages):

  • £100,000 at 15% for 10 years
  • Monthly payment of £1660
  • Total cost of your house: £1660 * (12 * 10) = £199,200!

Therefore high interest rates actually prevent growth in borrowing, create affordable housing and allow people to either pay off their mortgages faster and/or lower the rate of their monthly payments.

With lower monthly payments you have more room to maneuver around interest rate hikes, or with a smaller term, the effects of a rate hike are not going to be long term. It is also far easier to pay off £100k at a high interest rate than £300k at a low one, with high interest your money also goes to further and if rates then fall you are also going to do even better. (However if rate falls lead to high inflation it will take a while for your wages to catch up, in that time price of goods and services increases and you find the power of your money limited.)

So why doesn’t this happen in the real world? Herd mentality is one explanation. Back in the late 90’s/early 00’s everyone was beginning to learn how investors make money from property and wanted a go at it themselves. The problem is they didn’t know the first rule of investing.

The result was that many buy-to-let’ers found they had to reduce their rental rates to compete with the flood of rental properties on the market. At the same time, many newbies who bought a ridiculously priced property found that the rent was not enough to cover their mortgage repayments. The real winners are those that have sold to rent or who have been in the game a long time.

What happens next?

Many will quote that overused byline that the government won’t let it happen. Well guess what? The government (Gordon Brown) turned over control of interest rates to the MPC 10 years ago. This means that if things get out of control, the MPC will be used as the scapegoat. There is nothing to suggest in history that governments have been able to control inflation and there is nothing to suggest that they can control it now. The only tool that they have, outside of introducing new regulations to cap prices or forcing home-owners to lower their prices, is the base rate, which they can either lower or raise.

EDIT: Thanks Ian (comments)
If everyone learned this basic economic principle then sellers would be forced to haggle instead of taking advantage of naive buyers. The housing market would probably regulate itself invisibly capping prices, since buyers would actually walk away from overpriced deals. It also helps if buyers tool themselves up before going out looking for a property.

Take my advice, look out for lower rents, be prepared to rent for a while and wait for interest rates to rise and prices to fall before committing to a mortgage which will leave you with negative equity.

Read: Myth: House Prices Always Rise
Coming Soon: Housing Market Lies: Your Home Is An Investment

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Posted in Buyer Beware, Financial Terrorism, Housing Market Myths, Property Market | Tagged: , , , , , , , , , | 8 Comments »

[Amateur Theology] Predestination

Posted by Lex Fear on June 2, 2007

Time to visit this old cherub. I’ve been doing a bit of digging through my old computer files, seeing if anything can be updated or cast into the nether. I came across an old ‘apologetic’ I wrote.

It was written pretty soon after I had become a Christian, so you may find it a little over-simplified or a flawed exegesis. I’ve tried to remove most of the cheese. As always, comments welcome.

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Posted in Apologetics, Dark Side of the Light, Laymans Theology | Tagged: , , , | Leave a Comment »

[Gullibility Virus] Email Nostalgia

Posted by Lex Fear on June 2, 2007

This Post Is Rated: F for Fun. Some good ol’ web 1.0 humour.

Seems like a day doesn’t go by that I don’t get an offer from Russian beauty Natasha, who is looking for love and wants to marry me, or the lawyer of the recently deceased Directory of Operation International Credit Settlement, Central Bank Of Nigeria, who wants to channel some funds through a Western bank account and cut me in on it. Then there is the just plain wierd German ones like this:

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Posted in Ha-has | Tagged: , , , , , , | 1 Comment »

[Fearisms] What Do You Fear?

Posted by Lex Fear on June 2, 2007

Fear is a powerful, unpleasant feeling of risk or danger, either real or imagined. – Wikipedia.

All of us experience fear at different times for different reasons, it has the power to take over and control our thoughts and actions. It can affect who we are and who we become. Fear comes in many forms: mortal, and psychological.

Abandon All Fear exists as a testament to overcoming fear. It is a statement, a statement of truth about standing up against intimidation and the dark powers and principalities. It is about speaking truth, regardless of cultural sensibilities. It is about the experience and journey, of being an overcomer.

Fear of God doesn’t mean living in the shadow of a judge or higher power, it means being filled with a higher power and fearing nothing else on this earth.

Posted in Anecdotes | Tagged: , , , , | 1 Comment »