gearoidmm said:
2Pack
I'm not so sure about your analysis of where interest rates are going to go in the next couple of years. I agree that the current interest rate is too low and that we are likely to see rises but I think it is far too pessimistic to assume that they are going to reach 5% (you can remind me of this if it happens).
I won't remind you you know.
Looking at the recent experience of the UK, it only took a rise of 1.25% to take the wind out of the housing market there and slow the economy enough that the central bank started to drop rates again and, although there is a suggestion that rates may rise again soon there, it will not be by much. That in a an economy with almost full employment and rapid economic growth over the last few years.
Good point that. I had factored it in slightly. I would say the UK Central bank made LOTS of dire threats and SOME rate rises thrown in. The combination of BOTH eased the market _in case_ they went further. The ECB is afraid to threaten and must be judged on action alone. To get the same effect they will overshoot the rise cycle . Well played the UK !
Contrast that to the European economy where growth is sluggish at best and the unemployment rate is ~9%. There is still no sign of any large inflationary pressures apart from energy prices and little scope for wage demands given the competition from abroad. Add to that the strengthening euro and the 3% increase in VAT rates in Germany next year and these are the equivalent of adding a certain amount to the interest rate without any move by the ECB. Taking all this into consideration I think that the chance of rates rising as far as 5% is very low.
I feel the base rate will NOT need to go above 5% but would feel that stress testing to around that level is prudent. Base rate 5% = Mortgage rate 6% of course.
The problem in Europe is that if the ECB is seen as NOT serious about inflation the Euro could drop on sentiment which will then import inflation. Then they are in a "react to external pressure mode "and could have to tighten alarmingly to get taken "seriously" again. As fuel prices rose so did the Euro so we did not get the full oil price shock unlike the US. If sentiment turns against the Euro they could overtake 5% base to get taken seriously. Remember the euro was a basket case currency before 911 and Duisenbergs ECB was a joke, they will not willingly go there again .
I feel they must keep the euro where it is now as a consequence.
I don't think that a rate rise to this degree will be enough to cause a collapse in the housing market. A lot has been said on this site about the fact that people will start panic-selling their properties as soon as they stop going up in value.
I do feel that the new (post .com) investor who piled in post 2001 emergency rates and stamp duty lift will exit. I feel older investors (pre 2000) will not pile out. Some area on the peripheries like Kilbeggan or Carlow or Gorey will suffer most and the downswing will be asymettrical not universal.
From talking to 'investors' who have bought properties in the past few years - including those who are losing money on the rental income - even if prices drop, they will not sell up as they believe in property as a way to 'secure the future' and that it will always eventually go up in value.
Well they are wrong if they can remember 1980-1987 at all and if not they should find out about it.
It will take a major external shock for the property market to collapse in Ireland. That's not to say it will not happen but there are too many vested interests out there keeping the whole thing afloat to let it fall (including the 85% of Irish households that own their own home).
I take issue with this bit only, are you saying that 85% of Irish homes have no outstanding loans secured on them....at all ????
The reported 300,000 properties lying vacant around the state attest to the fact that Irish people don't look at property in the traditional sense in terms of returns and yields but as some kind of cash cow for future retirement or to give to the kids.
Now yes, I also believe that sentiment turns and new realities become accepted ....and sometimes very quickly.
Its not that we disagree or that we agree GM but that we see things somewhat differently my friend and model our economic scenarios differently as a consequence. I give 'sentiment' and turns in 'sentiment' a weighting in my models but you see I was in England in 1988 and also in 1991 and 1993 .