Negative interest rates are both gone and here at the same time.

Many commentators are talking about the end of negative interest rates in nominal terms and it’s true, interest rates are rising but in real terms they are still negative. Look at mortgage rates (for instance), you can borrow at 3% and below and meanwhile you have property price appreciation at 15% meaning that in real terms you are paying -12%.

If you can ever get something on a continuous basis at -12% that indicates ‘buy’, and that’s what people are doing, but notice that we mentioned ‘continuous’, the reality is that there is no arbitrage most of the time and this will be closed down by either rising costs, falling prices or some other outcome that we can’t forsee. Trees don’t grow to the sky, they never have and never will so the trajectory of house prices must rationalise but it’s hard to see how or where at present because the demand side seems so demonstrably strong.

I bumped into Kieran McQuinn on Pearse Street today and in our brief chat mentioned how the price changes are not sustainable, he mentioned the way that credit drove the last boom and that it isn’t present this time around, I’d counter that insitutional money and ZIRP are having a broadly similar effect because it isn’t like there is no leverage in the system, it just isn’t held by consumers.

That’s also why there are so many new institutional landlords on the scene, it makes sense that they would come to the fore when the raw materials of their trade (finance) are so cheap, but that could end as central banks become more hawkish.

What’s more, what if they do start to chase up interest rates to tame inflation and the inflation stays stubbornly ahead of the base rate? What would that mean and what would we do if that happened? It would certainly be a very tricky situation to manouvre ourselves out of.

These are just some quick thoughts on how interest rates on mortgages (and elsewhere) are so disjointed from the real economy. If a person only had access to credit and no job the average Joe would make more from buying and holding a house than they would from a year of work, that is not a healthy situation and a harbringer of a recession if ever I saw one because it shows the overheating effect has become so strong as to constitute a fundamental systemic risk. We just don’t know what will open the inevitable flood gates.


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