Monday, August 18, 2008

Mortgage rates up; house prices down

The Bank of England produce a nice measure of lending rates called the quoted mortgage rate. It is calculated as a weighted average of fixed-rate and tracker products, assuming a 75 percent LTV.

As the chart illustrates, mortgage costs have been creeping. More ominously for the Bank of England,those two recent rate cuts had virtually no effect on the rates charged by banks. Effective monetary policy depends on the central bank affecting all interest rates by changing short term rates. Those daft enough to call for a monetary policy easing would do well to take a look hard look at this chart.

There is an another interesting issue behind this chart. Up to now, the credit crunch, and in particular, the collapse of mortgage approvals has been described as a supply side problem. Banks, the suppliers of credit, have been unable to find wholesale funding, and this has restricted the amount of credit available. However, the higher rates must have also priced out potential home buyers.

Of course, there is nothing like higher mortgage rates for killing off a housing bubble.

(For those with vague acquaintance with supply and demand analysis, the supply function has shifted upwards and along the demand curve.)


  1. I'm not "daft enough" to call for a rate cut. However the reasoning for one is not so much any hope that it'll lower mortgage rates so much as it'll steepen the yield curve and allow banks to refinance their own long-term debt a little while longer, in the hope of putting off an eventual systemic collapse.

    I say let 'em burn, but the reasons behind a rate cut are sensible if you are pro-bank.


  2. Nick,

    There are others besides banks looking for rate cuts.

  3. How does this fit with the 'rapid growth in the money supply' thesis?

  4. vodka drinker,

    Could you be more specific?


  5. Woody,

    A fair question. The current monetary data shows continued rapid growth, as does the data from 12-18 months ago. Therefore, there is a lot of money out there, both causing today's inflation and will continue to do so for the foreseeable future.

    The decline in bank availability is really about coming from a very high level of growth to a more moderate level of growth. In any event, the past shows that bank credit can fall quite a bit and still have inflation.

    I can foresee a situation, where we have weak bank balance sheets being pumped out by central bank credit, which would support rising wage expectations, banks "rolling over" dead loans, growth slowing and living standards collapsing.

    For me, the great fallacy of today is that we can't have inflation if there is banking crisis and a recession.

    Wrong, wrong, wrong. The past tells us other wise (for example the 1974 banking crash here in the UK).


  6. NIck: but that would be bailing out careless bankers at public expense, as BofE profits not held on to for the reserves pass to the Treasury. If their collapse is certain, why not nationalise the casualties now? B. in C.

  7. That's why I wrote " if you are pro-bank."

    I'm not pro bank. Let them burn.