Much higher mortgage rates will burst the housing bubble

It has been an extraordinary few days with the Bank of Japan intervening to support the Yen and then the pressure switching to create something of a sterling crisis. But if we step back we see that the cause of all of this will also plough its way through housing markets.Let me start by showing the wrecking ball.

Bonds remained under pressure in Australia and Japan, while the benchmark 10-year Treasury yield held near 3.9% – a level last seen in 2010. ( Gulf News)

They nearly miss the main player but they get there at the end and a US ten-year yield of 3.9% is impacting all around the world. Remember it got as low as 0.5% as central banks surged into bond markets with their hands full of QE money looking to pay as much as they could for bonds, and hence as low a yield as possible. The central planners thought they were being very clever and a new version of the Masters (and Mistresses) of the financial universe.

Now as they rush to try and fix another mistake which came from their claim that inflation will be transitory we see that not only are we seeing a rise in interest-rates and yields we are seeing a surge. So they are holding ever larger losses on their balance sheet which they will argue does not matter as they can just create money. But the issue of interest does matter because when it was in their favour they sent it to the national treasuries and basked in the reflected praise. Going to be more uncomfortable as treasuries have to pay them money and add to the rising debt costs.Awkward.

Mortgage Rates

Now we can switch from the surge in bond yields which have been driven by the central bankers Here is Mortgage Daily News from yesterday.

The most recent historical high water market for we officially declared it to be boring last Tuesday.  Now, less than a week later, 14-year highs would be more exciting than boring.  As of mid-day today, we’re officially at 20 year highs.

So as Glenn Frey would say the heat is on. How much?

In fact, the shock hitting the U.S. housing market continues to grow: On Monday, the average 30-year fixed mortgage rate jumped to 6.87%. That marks both the highest mortgage rate since 2002 and the biggest 12-month jump (see chart below) since 1981. ( Fortune )

If we stay with Fortune we can compare with earlier this year.

The red-hot housing market would quickly shift in the face of spiked mortgage rates, which had jumped from 3.2% in January to over 4% by late March.

So we have had nearly 3 further jumps since then if we continue their imagery. The consequences of those moves are shown below.

Higher mortgage rates lead to some borrowers—who must meet lenders’ strict debt-to-ratios—losing their mortgage eligibility. It also prices some buyers out of the market altogether. A borrower in January who took out a $500,000 mortgage at a 3.2% rate would be on the hook for a $2,162 monthly principal and interest payment over the course of the 30-year loan. At a 6.8% rate, that monthly payment would be $3,260.

Let me analyse this via this statement from Fortune.

The housing correction is the U.S. housing market—which had been based on 3% mortgage rates—working towards equilibrium.

Firstly we have not seen any sort of equilibrium in financial matters for years as the central planners took charge. But we can use it to see there has been a shift from mortgage rates around 3% to ones around 7%. That is going to heavily affect what new buyers can pay. First time buyers will be affected heavily and those trading up less so because they will have some equity less so. But the simple fact is that they will be able to pay less for a house.

There is another factor which is bad for house prices and it comes from something else that higher interest-rates are doing.

Atlanta Federal Reserve Pres. Raphael Bostic tells @margbrennan that with the economy in its current state, “there will likely be some job losses.” But, he adds, “it’s going to be smaller than what we’ve seen in other situations and that’s what I’m banking on.” ( Face the Nation on CBS )

Unfortunately Mr.Bostic is not very good at predicting the future. Here he is from March 2021.

On balance, I don’t think it is clear that a surge in underlying inflation is imminent. The latest official readings substantiate that. For February, only one of the nine readings in our dashboard came in above the Fed’s target range. I watch for the trajectory of inflation, and I’m not sure the path bothers me.

So if he continues with this level of accuracy we could see quite a few job losses which would also be bad for the housing market as some would not be able to keep up their mortgage payments.

Fortune look back to 2008.

Unlike the 2008 housing crash, this time around we don’t have a housing supply glut nor a subprime crisis.

Whereas things do not have to be the same. We do have much higher mortgage rates and may well see job losses. Then we also have what we might call the “X-factor”, which is that the financial system is highly stressed and sharp moves like we have seen in bond yields and mortgage rates might catch someone out.

According to the Financial Times the times they are a-changing.

As they prepared for their wedding this year, New Yorkers Alexa Feneque and Silvio Tellez kept their list of desired gifts brief. Forgoing the usual hand towels and salt shakers, they asked their guests for just one thing. “We are working so hard to save for our first home and any contribution towards that will always be sincerely appreciated,” they wrote on their online wedding list, or registry as is it known in the US. The request netted the couple roughly $30,000,

The UK

The issue has heated up in the UK over the past few days as bond yields have been on rather a tear since the Mini-Budget. So fixed-rate mortgages were going to get more expensive before this happened.

Some of the UK’s biggest mortgage lenders, including Virgin Money and Skipton Building Society, have stopped offering new home loans in response to the market volatility triggered by the government’s mini-Budget.
Halifax, part of Lloyds Banking Group, the biggest lender in the UK, is also withdrawing a range of new home loans, it told brokers. ( FT)

Thus the situation was exacerbated as the opportunity to grab a deal at the previous interest-rates not only faded but ended in some cases. It does at least tell us those who were acting without hedging their mortgage offers.

We will now see a range of much higher mortgage rates.

“The huge rise in gilt yields means lenders have to reprice mortgages very significantly. I expect by next week there will be very few mortgage deals available with rates under 5 per cent. Any lender who hasn’t pulled out yet is almost certainly going to on Tuesday.”

I think we know what temporary means these days…

Halifax said that from Wednesday, it would withdraw its range of mortgage products with fees, which have cheaper rates. While the lender said that the measure was temporary, there was no timeline given for when it would be reversed.

Comment

There has been something of an unintentional move here by central banks. For over a decade they have regaled us with tales of Wealth Effects which has essentially boiled down to higher house prices ( and hoping we spend the gains). So the music was Elvis Costello style.

Pump it up, when you don’t really need it
Pump it up, until you can feel it

But now via their refusal to see the rise in inflation in 2021 they have found themselves stamping on the interest-rate button and thus hitting new buyers in the solar plexus. Si house prices will be singing along with Status Quo.

Get down deeper and downDown down deeper and downDown down deeper and downGet down deeper and down

The catch is that once this begins I expect the central bankers to panic so how long will it last? Also remember that whilst the central bankers are now on speed the response to them is much slower due to the spread of fixed-rate mortgages which in the UK are now 84% of the total.

 

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30 thoughts on “Much higher mortgage rates will burst the housing bubble

  1. According to the Guardian 300 mortgages have vanished in the last 24 hours. Forecast bank rate fallen slighlty from 6% to 5.8% but even that over double the average mortgage rate took out the last 12 months if not treble in many a case, near in mind expected bank rate will be lower than actual mortgage rates. Some people could be seeing quadruple mortgage rates.

    https://www.theguardian.com/business/live/2022/sep/27/sterling-crisis-markets-kwarteng-bank-of-england-mortgages-business-live

    If the budget was supposed to sustain the housing market it has backfired big time. In actual fact it could turn out to be worse than some think. Lots of small DIY and builders been updating run down property the last few years and a housing crash will put paid to all that and it won’t just affect small builders and DIY it will affect all the suppliers i.e bathroom and kitchen fitters, building supplies, B&Q, Homebase, Toolstation, the list goes on and in.

    If this budget was to prevent a recession, I happen to dissagree it could push britain into a longer and deeper recession. Higher mortgage rates may only affect 30% of mortgages but that is still a high number and more will come up for redemtion which was mentioned by one poster yesterday.

    The present GOV have boxed themselves in big time I don’t think they gave a thought to the implications of lowering all the taxes.

    Liz Truss opponent was going to be more fiscally prudent and warned her tax cuts would push interest rates up and they will do far more than some think.

    Whether we see a major crash or not is another matter as there is a shortage of housing stock but I think it has to have a major impact on house prices now going forward.

    • We’re about to find out there is no housing shortage, and that the reason house prices are insane is predominantly due to printy printy and ZIRP.

      If house prices don’t crash tens of millions of people won’t be able to afford to buy a house for their prolonged old age.

      You will find that once prices have crashed, and property is no longer seen as an investment, that the number of homes being built will go through the roof.

      For the simple fact, working people will once again be able to afford them.

  2. Hi Shaun
    Thank you for sharing your views on
    a weird global situation.
    Our first home in 1970 cost £3950
    about 4.5 years earnings it would
    now be £400k thats either a 100
    fold increase or more likely a 100fold
    decrease in the value of our currency.
    In the late 80’s when many homes
    were repossessed prices didn’t fall
    that much mostly people sat tight for
    6-7 years and then the casino ran till
    2008. This time I think the TPTB will
    soak up repossessed properties to
    rent out funded by a yet unkown
    acronym.
    JRH

    • JRH,

      When I looked back at the housing crash and I think there was more than one but cannot remember the dates, it deopended where you lived.

      Some areas the price didn’t move much some areas took a large fall. I expect a similar thing to happen this time around.

      You will see many areas prices don’t move much possibly in towns with an elderly population where they have moved to retire.

      Where you will see falls are in some large towns and cities. We also don;t know what is going to happen to unemployment if the UK doesn’t pick up productivity you could see unemployment rise and that will have an impact in some towns and cities.

      It is too early to forecast what will happen but I think the house price growth is now finished and even some buy to let landords will seek to get out, I had a friend who rented out a house and he told me it didn’t pay, some of his tennants didn’t pay the rent and also left his house in a poor state.

      Our growth in the UK has been poor the last decade and reducing taxes which has spooked the financial markets is the wrong way to have gone imo and we will pay for it through asset falls.

      Some would say this is a good thing as there has been an asset bubble since the last financial crisis in 2008.

    • I’d say those who sat tight could.
      BUT the mortgage mmarket is very different these days:
      This is the age of the fixed rate, wherein is 80% of the mortgage market.
      People are loaded to the eyeball, many multiples of their salary, on the assumption that they’d be able to re-fix at 2% for infinity.
      That was not the case in the 1980s, people expected more volatile rates, & inflation was such that wage rises would gradually make their mortgages more affordable.
      Not today.
      I’d also point out that repossession rates then were much higher BECAUSE INTEREST RATES WERE HIGHER.
      This time round, because the shock will be so great, I expect to see a much higher rate of repossessions to
      arrears.

      • Interest rates were much higher I remember that but multiples were much lower. With interest rates the last decade been lower and mutiples being higher it is going to be a bigger shock to some. You could be right repossesions will be higher.

        What I also expect is more people split up with their partners, I say that because more people live together than get married so there will be less divorces than there were in the 80s. The present generation tend to only get married after they get pregnant or have lived together a few years.

        But I think home ownership is less than it was in the Thatcher era so that could make the difference on repos.

        Whichever way you look at the situation if you went back 12 months when there was talk about negative interest rates the present situation is a real shock to the financial system which could have quite serious repercussions.

        If bank rates do go up to 5-6% then you will see morgages at 7-8% which is very high compared to the last decade where the average mortgage rates were not far off 2-3%.

        Whether rates will stay up to that level is another matter but GOV debt has never been higher and it’s all very well saying some coutries like the US have higher debt levels but we arenn’t the US where they have massive energy resources and cheaper food management.

        This country is being punished for BREXIT and now we are being punished by the money markets Britain isn’t in a good position at the moment with also a lack of housing.

        I don’t know what the answer is, as I said yesterday if the GOV wanted to create growth they needed to build houses and if the large construction companies were only able to dribble through building the GOV could have done so themselves.

        • “Interest rates were much higher I remember that but multiples were much lower. With interest rates the last decade been lower and mutiples being higher it is going to be a bigger shock to some.”

          That’s the point Peter Pan.
          Remember how, on a number of occasions you said that increased multiples were available because of affordability, & I said that shouldn’t be the case, because it was so dangerous?
          This is precisely what I meant.
          0.5% increase does the damage of 1-1,5% previously, so you very quickly, very,very quickly, reach a point where, when you’re fixed rate period ends, where your mortgage is unaffordable.

          The overwhelming majority of people hung onto their homes when mortgage rates hit 17% in 1980: how many could afford that now, if their fix ended?

          Now it may seem that I have little sympathy for the hundreds of thousands of families who are in danger of losing their homes over the coming year or two, but nothing could be further from the truth, & I sincerely hope that I was right yesterday & that JRH is today, when we say we hope that people can remain in their homes after default, because, just like every other time, homebuyers are amateur borrowers, but the mortgage holders are professional lenders, & although it is the latter where the blame lies, it’s the former who suffer.

          I view yesterday’s BoE statement as two fingers up to the markets, a dangerous game, & if Kwarteng really did go ahead with more tax cuts, I think it would mean a bloodbath.

          As things stand 300 000 families, who have to re-fix in the next three months face the triple whammy of exorbitant fuel costs, ballooning food prices, & rocketing housing costs. All of which brought upon them by the UK govt. with another 375 000 families facing even bleaker prospects in the New Year.

          This winter, many more people are likely to die in Europe as a direct result of the actions of Western Governments, than in the war in Ukraine.

        • Britain is being punished, because boomers spent like no tomorrow in the run up to 2008, then instead of being forced to take the medicine, the LIBLABCON decided to bail them out.

          Brexit was merely a reaction to the abnormal way society had evolved.

  3. Hi Shaun

    Great article as always

    I can see an FLS style bailout coming along shortly. Mortgage owner sad faces are already appearing the media. How can people be expected to pay a normal rate of interest on their mortgages? Headline article in the beeb today is the pulling of mortgages?

    Can the boe afford it? They’re already QTing 80bn. They’ll need 160bn for home energy costs. and 60bn for business energy.

    But as we’re told constantly the boe does not operate like a household budget.

    I’m sure FLS will come along after I’ve remortgaged. If so could I be a mortgage owner sad face 🙂

    • Hi anteos and thank you

      At the moment they are a boy stuck with things like the FLS as Bank Rate is already 2.25% so the past trick of charging banks mere 0.1% for the extra liquidity is over. Even the present Bank of England realises that they will have to do more at the next meeting so it will be 3% or more after then. Mind you that is cheaper than what mortgage rates are looking to be!

      But as we both know it is the one area where they are capable of great innovation so it is a case of watch this space…..

    • The £ has steadied against the dollar says Investing.com but only because the money markets believe the BOE will have to move soon, any delay and the £ could very well fall away again. Pill’s comments will be viewed as the need to increase rates sharply but the markets can be impatient. I cannot see the money markets wanting to wait for the BOE meeting in early November myself:

      By Geoffrey Smith

      Investing.com — The U.K. government’s new package of unfunded tax cuts will most likely require higher interest rates, a top Bank of England official said on Wednesday.

      The outlook for the U.K. has changed abruptly in the wake of Kwasi Kwarteng’s so-called ‘mini-budget’, Reuters reported the Bank’s chief economist Huw Pill as saying, adding that it’s “hard not to draw conclusions that we will need (a) significant monetary policy response.”

      The comments come a day after the worst volatility seen in U.K. foreign exchange and bond markets in over a decade, as investors dumped the pound and U.K. government bonds on fears that Kwarteng’s plans would cause inflation and put U.K. public finances on an unsustainable trajectory. The volatility had forced the Bank to issue a statement saying it would tighten monetary policy “as much as necessary” to bring inflation back down to its medium-term target of 2%. At 9.9% in August, it’s currently running at nearly five times that target.

      Kwarteng had announced the biggest tax cuts in over 50 years on Friday, on top of a package of energy subsidies to households and businesses that are likely to cost some 60 billion pounds over the next six months alone.

      The pound was steady after Pill’s comments hit the wires, having risen over half a percent in morning trade in London. By 10:00 ET (14:00 GMT), it was at $1.0754, nearly 4 cents above the all-time low it hit on Monday.

      However, the yield on the benchmark 10-Year U.K. government bond continued to price in assumptions of higher inflation over the medium term. It rose 12 basis points to 4.37%, its highest since the outbreak of the Great Financial Crisis in 2008. The yield on the more interest-rate sensitive two-year note, which had fallen at the open amid hopes that the market would recover, slid back to its highs of the day at 4.48%.

      https://uk.investing.com/news/forex-news/pound-rises-as-boes-pill-says-fiscal-news-needs-significant-policy-response-2763180

  4. The fall in sterling has mainly been caused by the B of E.
    The bank kept IR at emergency low levels for years, thus causing the rise in house prices.
    They saw the Fed increase by 0.75% twice, yet they delayed their meeting by a week and then only raised by 0.5% for the second time.
    They, also had a good idea of the government plans, it seems to me that they were either incompetent or deliberately wished to sabotage the new government.

    • nickvii,

      Its partly the BOE fault as shaun has outlined over the last few months the BOE have dragged theor feet but some economists like Blanchflower thought it wrong to raise rates on the verge of a recession and he wasn’t alone there I was inclined to agree at the time but I am not an economict.

      But as to the present situation even if the BOE had have raised rates a full 100bp the shock of tax cuts would still have hit the £ and the £ had little bounce today at present still under pressure.

      The fact of the matter is our borrowing was getting to high in any event its all very well saying other economies like the US have higher debt but there economies work very different.

      The budget helps the richest 1 to 5% of the UK population and the markets don’t like it one bit that is why the £ has been punished.

      Instead of improving the economy and trying to avert a recession all the budget has done is destroyed the £ and is pushing interest rates far higher than they would have done if the new leader had have been more financially prudent.

      What you will now find is instead of averting a recession there is a good chance Joe Public will be punished through sky high interest rates and consumer confidence which was poor completely collapse.

      I tend to watch retail stocks and most retail stocks trading at their 5 year or even all time lows many of the charts look like ski slopes only going one way down.

      Some large stocks like M&S, Hut Group, Currys, BooHoo have lost billions of pounds in their market value it is a shocking state of affairs and profits are going to be evaporated.

      In the meantime there has been such a shock to the financial system more mortgage lenders have pulled their deals today they don’t know yet where rates are going to settle. Over 300 mortgage products were pulled yesterday and a load more pulled their deals today

      https://www.bbc.co.uk/news/business-63041679

      The fall in the pound must equate to some severe shocks over the years like when we fell out oof the exchange rate mechanism but I suspect what has happened lately is one of the worst shocks tooi the financial system and yes also the financial crisis in 2008.

      The trouble with the curent crisis there seems to be no credible leader and faith in our current politicians to ty and avert the crisis getting worse.

      The UK economy wasn’t in good shape before the latest crisis we were being punished by Europe one way or another through BREXIT, Liz Truss has failed to get a trade deal with the US, we haven’t recovered from Covid and many a business has had to increase their debts through Covid, we are in an energy crisis due to the war in Ukraine, and the GOV has just destroyed the £ with a budget which most people feel is unfair and set to increase GOV debt.

      We are in a bad situation at the moment and both busiiness and familes going to suffer from higher debt interest.

      • I must be older than you Peter, as I do not think of IR of 4 – 5 % as “sky high”.

        You write about the stock market, I suggest you look at the Dow Jones.

        Everybody is in a mess due to the Central Banks keeping IR far too low for years, the effect of lockdown due to Covid and the disastrous green policies of the West, where we are pretending that renewables are able to replace fossil fuels and nuclear immediately.

        Yes it is going to be messy, but I do not think that reversing last year’s tax increases are the cause of our problems and to suggest that the stock markets did not like tax cuts when most of the people who work there will benefit is odd.

  5. The markets are short term; profit now! The media are also short term; headlines now!
    Truss and Kwarteng need to win an election in 2024…that is medium term.
    Their “dash for growth” may well work by then. I hope it does.
    Unlike the Barber “boom” most of the headwinds have probably already happened…

    • I dont think so the dash for growth has already backfired through an increase in interest rates which will increase inflation increase interest rates and punish households.

      Just been watching Chanel 4 talking of someone with a 2 year fix and when it comes to an end they will have to pay circa £6,000 a year more.

      Shocking !

    • Not according to ex Bean BOE member he said the current crisis has already added 20 billion a year to our debt interest and he intimated the UK may even have to go to the IMF for a bail out with the £ falling as it has.

      You see whatever the GOV think in trying to create growth it takes time to build a business, I know because I had a business but built my business in the 70s when the UK went on a building boom.

      But we are actualy in a recession which has been admitted by the BOE and not many people like to expand or build a business in uncertain times it is too risky.

      Bear in mind as time evolves what happend previously under a different GOV won’t necessarily work in todays times. Economies alter over time we need more houses now but tI see nothing in this budget to build more houses in fact the housing market was already over heated and we now face a crash.

      The increae in nat insurance was meant to improve the NHS and get waiting lists down and althougn the GOV say the cancelation of the NHS rise won’t make any difference as they will still fund it other ways most people don’t believe that.

      With so many people and tens of millions at that waiting for operations or ttreatment it isn’t the way to seek a boom there aren’t many people out there who are capable of building a busines want to work when unwell.

      This budget has already backfired and it has only just been announced a few days ago and it will be difficult to reverse. In fact I think last weeks budget almost as dangerous as when we had the poll tax and it brought Thatcher down.

      This is typical toriies who have no idea what the average family needs if trickle down economics was proven to work it would not have been reversed.

      I was watching Sky news last night questions and answers on the budget and one of the questions was to ask where trickle down had worked and a economist respomnse was Singapore well fecking heck you cannot compare Singapore with the UK its like comparing apples and pears you cannot compare different countries when they rely on or have different resources.

      I have always said the US has managed to have a strong currency compared to the UK because they have different resources, they had sense to frack so they didn’t need to rely on foreign oil and they have good food resources.

      Tiny Britain has sold off a lot of their good companies, we have failed to invest in robot technology and I don’t know where all these 20 million or so jobs where going to be lost through robot and automation which Carney thought was on the way we are short in the UK oif skilled workers in just about every industry.

      The problems in the UK go much deeper than economic policies we have a drug problem in the UK crime is out of control and people have no faith in the police anymore less than 2% of crimes ever reach court.

      • Apologies for any bad grammar I suffer from dyslexia made worse by being pumped up with pain killers and know what it is like on long waiting lists and suffering from a complex illness. Most of my day I spend in a trance but economics is one of my favourite subjects.

  6. The IMF put the boot in saying the budget will increase inequality and that is true. The beneficaries are all those people on 150k a year and super rich

    By Andrea Shalal

    WASHINGTON (Reuters) -Fiscal measures adopted by Britain will likely increase inequality, a spokesperson for the International Monetary Fund said on Tuesday, urging UK authorities to consider providing more targeted support to affected families and businesses.

    “We are closely monitoring recent economic developments in the UK and are engaged with the authorities,” the spokesperson said, in response to a query from Reuters after the British pound hit an all-time low amid spiking market concerns.

    “Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” the spokesperson said in the IMF’s first public reaction.

    Britain’s new finance minister Kwasi Kwarteng sent sterling and government bonds into freefall on Friday with a budget aimed at growing the economy by cutting taxes and sharply increasing government borrowing.

    Kwarteng responded by saying he would set out medium-term debt-cutting plans on Nov. 23, alongside forecasts from the independent Office for Budget Responsibility of the full scale of government borrowing.

    The IMF understands that Britain’s “sizable fiscal package” was intended to help residents deal with higher energy prices and to boost growth via tax cuts and supply measures, but such measures could put fiscal policy at cross purposes with monetary policy, the spokesperson said.

    Kwarteng’s Nov. 23 budget would provide an “early opportunity for the UK government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high-income earners,” the spokesperson added.

    • Hi Peter

      If I was the IMF and had contributed to inequality on the scale that they did in Argentina and Greece O would keep rather quiet on the subject. As we are not in an IMF programme it is none of their business and frankly looks to come from the arena that I avoid.

  7. Professor
    @D_Blanchflower
    :

    “If you’re the Chancellor, what you’ve done is crashed the bond markets, the foreign exchange markets, the stock market has dropped, the housing market is in trouble and you create a giant recession… I’ve never seen such raging incompetence, ever.”

  8. What we have in the UK economy is a perfect storm.

    1. Legacy Government debt, especially from Covid.
    2. Up to 1m withdrawn from workforce post Covid and an unproductive inefficient work from home culture.
    3. Government social benefits at least equal to minimum wage.
    4. Bureaucratic and unreformable NHS costing over 40% of Government annual tax receipts, with an aging population.
    5. Overvalued housing market with over regulated rental and new build sectors.
    6. Inefficient infrastructure, roads, railways, water, etc.
    6. Rearmament costs.
    7. Energy insecurity with no public awareness of real timescale or costs to provide energy stability.
    8. Full acceptance of net zero targets without any costings.
    9. Acceptance of all aspects of a new 21st century culture of me first without consideration of impact on productivity.
    10. A failing currency with the highest trade deficits in UK history.
    And finally
    A parliament full of self serving individuals whose answer to every problem or issue is spend , spend spend

    What possibly could improve!

  9. Hi Shaun, as you are aware, or should be, I admire both your expertise & your integrity, & find every day’s blogs stimulating & educational
    I posted this yesterday, as I thought it was relevant, but obviously it’s more relevant today, & wondered if you would run over it if you have time, telling me if, & when You think I am wrong:
    ___________

    “It has rapidly become obvious that the housing market is beyond defence, but if we have the 6-7% IR that I posted might be necessary on Friday, & analysts are projecting 5% or more, & we have 5 year yields @ 4.5%, I don’t think we can afford the cheapest fixed-rate mortgages at less than 5% immediately (one would assume that government bonds are still seen as more secure than mortgage lending, especially in this climate).

    Kwarteng has promised further tax cuts in the spring, & if the market prices them in, then a 1% raise, followed by another, then another, then another, will be seen as too little too late: the government will be seen as acting only recalcitrantly & truculently on inflation, or, in other words, retaining the tone which has landed us here.

    I believe that if it really wants to convince the market that it’s serious on acting against inflation, then it has to show this immediately.
    Recognise that the game is up & immediately give up defence of the housing market, bringing in emergency legislation that allows present mortgage holders who default, to remain in their homes at market rent levels.
    Not only do I not agree that we should wait until the next MPC meeting to raise again (too late) but, because of previous dithering, 1% is no longer enough (too little).
    I would go for an immediate raise of 1.5%, with a similar “whatever it takes” message for the upcoming months. THIS is where we need to use the sledgehammer!

    It’s misery all round at that, & will mean even more people losing their homes, but it’s the consequence of previous actions, & the least-worst option afaic.

    Remember what Forbin says, because it’s true, “It’ll start slow, but very quickly gain speed.”

    My expectations are that the govt will not act as I suggest it should & the descent may well be parabolic, especially if that’s, as it seems, the intention.

    One further point, if lack of supply is causing the winter gas shortage, no amount of government help will solve the problem: it will be a fight amongst governments to obtain the supplies, through grants or subsidies, their populace needs, forcing prices they pay ever higher.
    YOU CANNOT PRINT GAS!”

    Do you think there is no longer any chance of defending the housing market?
    Is the supposed incompetence of the Truss regime real, or is it that if the housing market cannot be saved, nothing can be saved, so it matters little what else is done?

    This is the third punch in the essentials triple whammy combination: food, fuel & shelter.
    A cynic might think this crash was designed to hit the poor

    As a post script, we import 42% of our food, so the drop in currency means another round of food inflation in the pipeline.

    • Hi therrawbuzzin

      As you know I have argued for more than a decade now against the easy money policies that have been pursued. Now we find ourselves picking up one of the cans that were kicked into the future as interest-rates soar. But having worked through these type of crisis I know that they do pass.. Or at least some feature of them do as for example the rise in UK bond yields will be another form of the stop loss chase we saw in the currency markets Monday morning.

      So we do not yet know how things will settle down and would suggest we wait a couple of weeks or so.

      As to energy policy I have seldom seen such a shambles with so little apparent urgency to fix it. We have a political class continuing to press for unreliable renewables and I see that as the biggest crisis. It is fueling everything else. We had some wind today and had better hope for a windy winter.

    • Just a few quickies:

      1. Well the lenders are already pulling their deals but I suspect they are awaiting to see how things settle down in a day or two or maybe a couple of weeks. Pill seemed to be suggesting the BOE will bring forward a hike in interest rates but the longer the BOE waits the £ will struggle to make heaway on the upside and could well come under pressure.

      2. As for more tax cuts in the Spring Kwarting days may be numbered, maybe I am being too optimistic here but he has spooked the markets big time and the conservagtives must be reeling behind the scenes at the markets reaction. I have hear he has been talking to the financial markets and institutions today to try and calm markets but the footsie 250 still tanking today its hit large business badly. Many a small to medium large business carrying huge debts and interest rises are going to be a killer.

      3. The banks do need to act quickly to increase rates to increase the £ but it may be too late the financial markets have lost confidence in the Tories imo. I doubt very much whether the GOV will seek to protect people from losing their homes however.

      4. Forbin’s comments where the possible snowball effect and it gains traction as the ball builds. Well that is my analogy.

      5.Gas…well its goinng to be painful in the short term but Putin seems to be losing the war and if fthe war does end so does the energy crisis.

      6. The GOV cannot defend the housing crisis with interest rates forecast at BOE rate of circa 6% stamp duty may have encouraged first time buyers but many will be put off on the basis it is better to wait for the crash and others will be put off with higher mortgage rates, lets face it where you could get a mortgage of 3% or even less if you tried a few weeks ago you will be looking for 50% to double those rates now. Its too late now interest rates were already on the rise now they will rise even faster.

      7. Its a triple whamy so far as the working class and the poor hit from every direction the budget was for the rich it goes to show how out of touch Liz Truss is of the economhy and what was needed the money markets have made their mind up and quickly at that hence the £ punished to pulverised.

      8 Yes we do import much of our food and electrical and clothes as well. All will have to go up and they were all going up before the budget the boss of NEXT said as much in his various statements to the market this early this year he even warned of two rises this year Spring and Autumn.

      In conclusion the budget simply caused a terrible crisis which may settle down but I doubt it without BOE intervention and that means ever higher interest rate rises which have put an end to most of the house price rises and could easily cause a crash. But I dont think for one minute the budget will prevent a recession because people will stop spending and business will suffer as well short term mamny a business which is highly indebted will hit the wall. The GOV fooked up big time I was a conservative but won’t vote conservative next time Truss has lost my trust.

      • The budget was fantastic, as it has now sped up the prolonged destruction of the country.

        We need the bubbles to burst, all of them, no matter what pain it costs people.

        Recessions are a much needed part of capitalism, we haven’t had one since the late early 90s.

        Whats happened isn’t Kawasaki or Truss’s fault, its been inevitable since 2008 (or 1979)

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