1nvest wrote:A simple model is to assume a two thirds take-home out of a £24K average wage (16K net) has on average half available to be spent on a mortgage. At 2% rates and 8K available that opens up a interest only repayment mortgage of £400K home value in the average case.
If interest rates rise to 4% the same 8K of available funds buys a £200K mortgage/home value. i.e. home values, stocks and long dated bonds might all halve in price if/when interest rates rise from 2% to 4%..........
........A retiree living in a 500K home with another 500K invested in a stock portfolio that is generating 4% dividends, 20K/year, may feel themselves to be a comfortable millionaire. But if/when mortgage interest rates rise to 4% from 2% levels and both their stocks and home values had halved, even though the portfolio may be paying 6% dividend, 250K home value, 250K stock value paying 6% is down 5K on income production, a 25% haircut ... perhaps at a time when inflation is also modest (so even lower in real terms). In contrast another who lived in a 250K home, had 250K in stock and 500K in cash might see their net wealth having dropped from 1M down to 750K. We're in a era where very low interest rates is having many with very high levels of cash reserves and where even accepting a small regular loss in real terms on that cash is seen as being acceptable given the potentially significant risk in other assets as/when interest rates/inflation rises.
Hi 1nvest,
I simply don't buy the idea that house prices would halve (in the UK) if interest rates went up to a meagre 4%. Or do you mean in real terms over a long period, or what?
a) Boris and his chums and the Daily Mail simply wouldn't allow it.
b) My own experience in the mid seventies when I bought a house for 17k was the absolute opposite. The floating interest rate on my mortgage peaked soon after I bought the house at over 14%. I sold the house in 1980 for 51k. I never bothered to work out whether the house increased in value in real terms, but it certainly seemed like it at the time.
c) Unlike stocks bonds or cash, you can live in your house and you probably wouldn't sell it until your 500k (maybe diminished to 250k) ran out.
Or am I missing something?
But I agree with the bit about having high levels of cash reserves.
regards S