The Unique Property
What Rising Interest Rates Will do for Mortgages
You can watch this presentation on Youtube:
Will it? Or wont it?
I am talking about the persistence of the current rise in
inflation. It's hit 5% already.
Long-time readers of my work will be familiar with my basic
mantras, which hold good for ever. Let me remind you of a few of
I work hard for my money, and I expect it
to work hard for me
That links up with the following:
The best servant you will ever have is
That's why all my life I have saved and invested half my income.
That means all that saved money has been put out to work for me
to provide me with a further income. I work, and my money works
alongside me. And as time goes on I need to work less because
all my servants out there are also working for me.
Most people work for a master, and receive payment at the end of
each month. They are also working to help their employer
increase his income. I am an employer, and my money is working
for me, and those servants don't argue and dont need insurance
policies, neither do they go on holiday or fall sick, and they
Since these blogs are part of the Unique Property site I wish to
link those maxims to the purchase and ownership of real estate.
The problem for most people who own real estate is that they
need to borrow money to pay for it, and unlike past times, the
last thirty years has been one of declining interest rates,
making the cost of buying a house cheaper and cheaper as the
years have passed by. This should have made life easier for
people to start saving and putting the money saved out to work.
Let me add another of my maxims that have guided me in my
The most advantageous way to buy real
estate is to buy when interest rates are high, but are
decreasing. By contrast, the worst time to buy is when
interest rates are low because the asymmetry is against you.
Let me explain.
The last time when it was great to buy real estate was during
the nineties. By the time we had got to 2004 things were
starting to look grim, and I advised my clients to stop buying,
and maybe consider taking some profits. Maybe I was a couple of
years early, but I dont regret following my own advice.
In 1991 interest rates were high but falling. There had just
been a house-price crash. No-one wanted to buy real estate, so
prices were on the floor. Low prices, and reducing interest
rates meant it was the ideal time to buy. You can afford to buy
because prices are low. You can assume prices will therefore
rise, or at least not fall much further; and you can assume that
as interest rates are high but falling, that they are likely to
continue to fall. You get the best of both worlds. The asymmetry
is in your favour.
If we look at the opposite situation, existing high prices, and
interest rates on the floor, we have a situation where the only
change possible is for house prices to fall if inflation
continues to rise, and the only way interest rates can move is
In short, the likelihood of prices rising is low, and the
likelihood of interest rates rising is high. That means the
asymmetry is against you.
I maintain that now is possibly the very worst time to buy.
Obviously I may be wrong as I dont have that essential crystal
ball, but the odds are against you at the moment. If you dont
know the future, dont expect to win by betting against the odds.
Now let's set that against the situation in which the economies
of the world find themselves.
Government bonds are yielding pitiful returns even for a low
inflationary environment. However, in an environment where
inflation is rising above 5%, the return on those bonds is
seriously negative. You are guaranteed to lose approximately 5%
of your invested wealth every year. That's insane.
If you add to that absurdity by buying at the top of the market,
future prices will almost guarantee you losing even more money.
And when interest rates rise you will start losing even more.
Dont say I didn't warn you.
Now let's look at some distinct possibilities.
When inflation goes from 1.5% to 4.5% as it has this year, that
loss in purchasing power has tripled. That's not funny. If the
rate goes from 5% to 6% it only increases by a fifth, but if it
goes from 1% to 5% it has increased by 500%. That's a nasty hit
to the average household. What does that tell you? Obviously,
the average household is going to find the going tough. That
means you won't get people chasing house prices higher, because
they won't have the money to do so.
Now add to that the possibility of interest rates increasing by
a similar amount. That takes the average household into ruin.
It's interesting to note how this is set out in the media down
"Between 1990 and 2020, the Reserve Bank of
Australia slashed interest rates time and time again,
with rates falling from 17.5 per cent in January 1990 to sit
at just 0.1 per cent today."
What would a reversal of interest rate policy do to household
finances if the current rates simply rose back to 5%? The
average household would be facing bankruptcy. And what will that
do to house prices? Those who can't pay the increased interest
charges will be forced to sell. Those who cant pay the increased
interest charges won't be able to pay the higher costs
associated with the loans needed to buy, so they will back off.
House prices will fall. That will put more people under water,
and you can work out the rest for yourself.
There is another side to this problem.
There's also the demographic factor to consider. A growing
population would mean that GDP was likely to grow over time, no
matter what. That would make debt and borrowing less of a
problem over the years as there would be more people around in
the future to bear the burden.
Unfortunately, rather a lot of pension schemes are not properly
funded. In the UK there is no government pension fund at all. A
pension fund would be able to grow over time, but as there is no
fund, there is nothing to grow. Pensions are currently paid out
of taxation. What an absurd idea. So who will finance pension
funds, welfare and other government programs in the future?
This is a problem that deserves a special article. I will deal
with this intriguing, but in my opinion, misguided argument,
next week. Do tune in.