Contract rates not obeying inflation

[jamesbrown]

You may be right. I'm not a fortune teller.
But the financial markets don't think so.

For example you can get a fixed term mortgage, with a goof LTV for around 2% for 2 years. 3.2% over 5 years.

If inflation was as embedded as say it might be, interest rates are going to be going up. If the lenders thought that was the case they wouldn't be offering those mortgage rates.

Supply side shock from covid, brexit and Russia are the causes of the current inflation. All of which are only going to impact inflation in the short term.

The markets can change pretty quickly. It continues along indifferently and, then, snap. Look at the situation in the US, which is a bit ahead of us. Mortgage rates have spiked, although the benchmark there is 30 yrs, so there isn't a direct read across to the UK market.

All of those things you mention are increasingly looking like medium-term shocks, not short-term ones and, unfortunately, every single one of them has scope to cause acceleration, not just a continuation (Nord Stream 1, NI protocol, new variants and winter coming etc.).

[jamesbrown]

I wouldn't bank on Truss not starting a trade war, for example, and her cancelled tax rises will probably add 0.5% or more to inflation next year. Plus she wants to look at the BoE mandate.

[Lance]

I wouldn't bank on Truss not starting a trade war, for example, and her cancelled tax rises will probably add 0.5% or more to inflation next year. Plus she wants to look at the BoE mandate.

she is quite mad isn't she?

I like to think that MPs will keep her reigned in.
The ERG have already got what they want, and don't care about the NIP. They won't want her screwing the economy for a few political points over Ireland.
And the rest of the Tory MPs are only concerned about the GE 2024. So on that basis as long as they can keep Pritti little racist happy with her hateful schemes they might stand a chance of keeping some red wall seats.

[jamesbrown]

she is quite mad isn't she?

I like to think that MPs will keep her reigned in.
The ERG have already got what they want, and don't care about the NIP. They won't want her screwing the economy for a few political points over Ireland.
And the rest of the Tory MPs are only concerned about the GE 2024. So on that basis as long as they can keep Pritti little racist happy with her hateful schemes they might stand a chance of keeping some red wall seats.

I wouldn't bet on it. The ERG actually care about the NIP quite a lot and they will own her. It's the narcissism of small differences - we are not completely free until we've relocated geographically, but until then... The NIP Bill is official gov't policy and passed all HoC stages with large majorities. Both candidates have acceded to it, although it's certainly true that Sunak would back down in the end. It's also true that the hard line may not continue when it's eviscerated by the Lords and returns to the HoC, but I wouldn't bet on it. Most likely, it will be pushed through via the Parliament Act, less than a year from now, and the EU apparently sees that as the trigger for a trade war. Truss might pull back, but I wouldn't be confident about it. And if you think inflation is bad now, a full on trade war would take it to the moon.

[KentDogWalker]

so what is the main cause that house prices have exceeded pay raises?

[eek]

so what is the main cause that house prices have exceeded pay raises?

Lack of supply
Banks willing to lend significantly larger multiples of income than before
Banks willing to lend significantly larger multiples based on estimated rental income

Low interests rating making 2 and 3 plausible.

[Lance]

Lack of supply
Banks willing to lend significantly larger multiples of income than before
Banks willing to lend significantly larger multiples based on estimated rental income

Low interests rating making 2 and 3 plausible.

Also published inflation rates are generally CPI which excludes housing.

Housing is the real elephant in the room for the cost of living. It's not included in the headline figures, yet it is more than 50% of the living cost of the poorest.
And Rishi says he'll protect the green belt.
Truss says she'll build more houses, yet when she was responsible for building houses she didn;t build a single one.

Scrap the green belt. Reform planning. Build more houses. (note that's not a vote winner cos of NIMBYs so will never happen).

Interesting project that will never happen in the UK.....
Virginia launches world’s biggest 3D-printed housing project (freethink.com)

[dsc]

Also published inflation rates are generally CPI which excludes housing.

Housing is the real elephant in the room for the cost of living. It's not included in the headline figures, yet it is more than 50% of the living cost of the poorest.
And Rishi says he'll protect the green belt.
Truss says she'll build more houses, yet when she was responsible for building houses she didn;t build a single one.

Scrap the green belt. Reform planning. Build more houses. (note that's not a vote winner cos of NIMBYs so will never happen).

Interesting project that will never happen in the UK.....
Virginia launches world’s biggest 3D-printed housing project (freethink.com)

The amount of land available vs amount of houses built in the UK is for me (expat) really baffling. Also the almost absolute lack of block of flats which seems to always be somehow linked to social housing, thus looked down upon (and what is built is sh*te quality). Look at most European countries like Germany, Holland where you can get very nice, large apartments both to buy or let - this definitely works when you have limited land (again not really something the UK struggles with, but it simply chooses to limit itself).

[dsc]

Lack of supply
Banks willing to lend significantly larger multiples of income than before
Banks willing to lend significantly larger multiples based on estimated rental income

Low interests rating making 2 and 3 plausible.

1 being the reason why housing prices will most likely not fall, even with higher interest rates (and no, 1.25% is not a high level of interest rates).

[jamesbrown]

1 being the reason why housing prices will most likely not fall, even with higher interest rates (and no, 1.25% is not a high level of interest rates).

I think you can overestimate local factors on the short time scales where assets reprice dramatically. The recent boom in house prices has been global or, at least, across much of the globe, along with share prices and other assets. It's no secret that QE was intended to boost asset prices and it worked very well. As QE unwinds, it is unlikely that a much reduced money supply won't cause a significant reversal in the same markets/assets. In the short-term, things like local supply are a side show relative to those bigger forces, although they are important in the long run, I agree. Oh, and rates are probably going up to 1.75% next week, and then 2-2.25% a month later.