Interesting implications here. Usually, in the UK, mortgage rates are linked almost directly to the Bank of England base interest rate. That’s under normal, benign market conditions, where money is flowing freely between banks.
At the moment, though, many USA mortgage companies are going bust due to reckless lending practices. All their debts have been traded worldwide via difficult to understand investments, so much so, that all banks are now worried that whatever they lend to each other might not get paid back.
To counter this risk, they’re putting their interest rates up just in case. (This is LIBOR, or London Interbank Offered Rate, currently 1% over base, the biggest gap since the mid 80’s.)
So the mortgage companies can’t get cheap money to lend out any more, which means your mortgage rate is going to go up. That means individuals going bust are going to increase even more than they have of late. That means that house prices should go down, especially if the government clamp down on immigration, like they’ve promised. If house prices go down, the reckless lending will stop, as people shouldn’t need to borrow so much to buy them.
Well that’s a self-regulating system for you. I have to admit, what I can’t believe is how long this bubble has lasted so far. But a bubble it is, that I’m sure of.
With the recent 10% fall in the FTSE, stocks are now looking very cheap and I’m in agreement with some commentators that stocks are going to rally when all of this sub-prime lending quagmire shakes out, regardless of earnings.
It might be bumpy for the rest of the year, but as Del Trotter says ‘He who dares, wins, he who hesitates…don’t!’. Place your bets now.
