If 5% rate is here to stay

[JustAlice]

I've read yesterday that average 2-year interest rate is now 5.4%, and a 5-year rate is 5.9%, meaning that banks think the rates will be growing long-term.
As a FTB I'd like to stay optimistic - ME conflict without NATO support can't last forewer, right? The banks change their forecasts all the time. But I've made some calculations in another thread and still can't get over how jump from 1% to 5% interest rate in a relatively short time means we have now 100K less to spend on a property.
The properties we're looking at are fairly modest, and now I'm not sure we'll be able to afford them, even being high-earners.
Am I the only one who was unaware that higher interest rates impact borrowing power so badly?

This is the calculator I used, with 60 month fixed rates, and the term of 20 years. www.themoneycalculator.com/mortgages/calculators/mortgage-payment-predictor/#!/dealfinder/mortgages/

Oh dear, its started. Inflation jumped a whopping 10% in April and most of the extra costs haven't even started to filter through yet. This could get ugly fast - how depressing 😔

Without wishing to come across as stupid, what implications could there be in terms of the housing market? I really don’t want mortgage rates to go higher than 6% when I buy next year!

6% is not an unusual rate. I was paying 6% in 2014 that’s not abnormal.
It’s not comfortable, but it’s still doable for most people.
But try not to worry this is temporary. We all know it’s temporary. Nobody is panicking so you shouldn’t.
you also have to remember if interest rates go up to 6% that means you’re getting 6% on your savings as well so they taken one hand and give you in the other and then tax it 😬

Its not a stupid question at all, in fact anyone who tells you they think they know where the rates (and as a result house prices) will be in 2027 is a bul###iter.

Two of the more likley possibilities in my mind are.

1. Temporary'ish increases in borrowing rates this year resulting in house prices softening further (good for your situation) followed next year by rates reducing and pent up supply of houses coming to market (as people can afford to move again) - so lots of choice at lower prices.

1. A more prolonged more significant increase in borrowing costs combined with a serious increase in cost of living and inflation. Creating a more serious down turn in the market and much more significant price drop. In this scenario people can't afford to move so supply becomes constrained and choice limited. Even though values are much lower many can't afford to buy because of reduced affordability.

1. QE (money printing) is started again by a desperate government. In addition emergency low rates are introduced again - the only thing that could start prices to climb again. Banks are well happy because they get bailed out again, people temporarily feel positive. Then they realise that all QE really did was give the financial institutions a massive bonus - and them much more debt to service to buy a shoe box.

There are of course many other possible scenarios and neither I mention take into account any other "unforeseen" global economic event presenting itself. The list of possibilities for that is pretty extensive.

Haven’t you been predicting a 30% fall since 2023? Or am I mixing you up with somebody else?

Definitely mixing me up with someone else. I dont do predictions - just possibilities. The chances of a 30% drop are pretty remote in my opinion - unless something very major globally happens. I'd put the possibility of 10% to 20% reductions, in some areas, as potentially feasible by next year. But by no means am I ever certain enough to call that a prediction - just that its a definate possibility given current circumstances and direction of travel. Those factors are very fluid though. Things can and do change unexpectedly - so for most of us its just best guess, at the time, finger in the air stuff imo.

Equally things could go the other way. I personally believe that affordability, to a large extent, influences values. Supply too, but looking at the UK I dont personally see a significant shortage of homes, a shortage of affordable homes yes. Affordability has shrunk and looks likley to shrink further short term. However levers have been pulled in the past - for example emergency low interest rates, help to sell and QE -that have provided tremendous boosts to the market. That could happen again, I feel its unlikely but definitely wouldn't rule that, or something similar out.
Where do you see things headed at the moment?

I’m in the real wonderful position of heads I win Tails that I win too.
I would like to see drops of at least 20% to get them back to 2019 prices as an absolute minimum.
Nothing happened in 2020 that justified the crazy.
However I think they’ll choose QE because they always do. They’ve got literally no other options that don’t lead to Armageddon (in the minds of the voters).

You could easily be right. I'm not sure that another round of QE wouldn't be an armageddon of its own type though. It was a global experiment really - it didn't do anything other than kick the problems down the road, at least for society in general. Has that been recognised enough - I just dont know.

Even where it’s recognised they simply don’t care. I’ve pointed out repeatedly to the grandparents of the family that they’re causing major issues later on on many different aspects global warming finances etc.
They literally don’t care, and I suppose they’re right too really because they won’t be here to see the consequences

I don't think QE will work this time as it will cause it's own set of problems.

This is the dilemma at the moment. We have low (practically no) growth plus higher inflation (in otherwords we are heading to stagflation)

Cutting interest rates to stimulate growth will cause inflation to go up so they can't do that.

Raising interest rates will cause inflation to fall but will hurt growth so they can't do that either.

QE causes inflation and also gives a big sign to the market that our country is not coping financially (like they need more proof!). It also devalues our currency. None of these are good.

This is why the bank of England is indicating they are in a bit of a pickle just now.

Quite honestly no goverment can 'fix' us without some very big changes. The UK has been resting on its laurels for quite some time now (30-50years)

As to what house prices do who knows. If unemployment continues to rise we may have some forced sellers. My guess is most people will batten down the hatches and stay put.

I bought my first house in early nineties and seem to recall we were paying around 7-8% so that feels pretty 'normal' to me.

Quantity easing didn’t work last time either, but it didn’t stop them

Owning is different to having mortgage debt, very different.

Ok 👌