May 23, 2004

Sprained ankle? Amputate the leg!

I've got a lengthier post on this subject over at felixsalmon.com, but I had to share the lead sentence of this story from the BBC:

Interest rates will have to double to avoid the property market spiralling out of control then crashing, the Council of Mortgage Lenders has warned.

At the risk of being accused of "not getting it", isn't this a bit like a skier stopping himself from going too fast by aiming straight for the nearest tree?

Posted by Felix at 06:47 AM GMT
Comments
#1

Which interest rate? The Fed funds rate is now 1% and the market expects it to go to 2-3% by the end of 2005. So short term rates will go up and probably double. This isn't really news. But longer term rates certainly won't double. The 10-year is now, what, 4.something%? It could go to 5, 5.5%. Unlikely to hit 6% any time soon. We've got a steep yield curve, folks, and a rise on the short end is going to flatten it - it's not going to pick up that curve and drop it in the same shape down the graph.

Posted by: Jame on May 25, 2004 10:34 PM
#2

It seems like they're referring to British residential mortgage rates, Jame. But yes, Felix, it doesn't make sense because a doubling of mortgage rates would probably bring on a crash in housing prices simply by weakening the demand side of the equation. For instance, a �250,000 home purchase with a 4.5% mortgage would carry a monthly nut of just under �1,300, but at 9% the payment would be �2,000. That's a difference of almost �10,000 a year, which would cause buyers to lower their sights, and in many cases indefinitely delay making the home purchase.

Posted by: Sterling on May 28, 2004 03:58 AM