I am not sure that I agree with the premise of this article. It is good to be prudent, but looking back on interest rates only into the eighties tends to make the picture bleaker than it may actually be. The spike in interest rates in the latter part of the last century was an enormous anomaly, in a broader historical context. Will it be repeated? I’m no economist, but I don’t think the world economy can handle a drain of that magnitude again for a long, long time. Rates are super low now because too much money has been siphoned upstairs for too long. Even the plutocrats realize that you cannot get steaks and milk from the same cow indefinitely. Take a look back to the sixties, when interest rate cap legislation was gutted, to find the source of many of the economic swings we have experienced in the past forty years. Like the securities legislation put in place in the thirties (and since removed, arguably leading to the latest recession), rate cap legislation was crafted by wiser, longer-sighted men than those running the ship today. The marketplace has corrected itself, as it must, but the incidental damage has been brutal.
The main point I was trying to get across in this article is that when estimating how much you can afford, the current interest rates are anomalies and one shouldn’t use them to forecast for the next 5-10 years. You should see how much you can afford at a rate of 5%-7% because that seems to be about average. Maxing your mortgage payments at the historically low levels we’re seeing now is short-sighted because rates will go up. I threw the 80s example in there just to remind people that rates do go up. Plus, if you unpack that 12.65% a little bit and realize that’s only the median, then there must have been some rates above that. But yes, the 80s was an anomaly.
I take issue with rate caps being wise. I don’t think one can mess with the free market and expect no repercussions. Rate caps are only worthwhile when the lenders want to charge a high amount. Let me use an example: The cap is 9%, but everything else is yielding 11%. So lenders are only able to charge 9% on mortgages, but they see other instruments are returning 11%. They would take their money out of mortgages and put them in the other instruments. That would dry up the money left for mortgages. With less people able to buy, house prices would go down. This isn’t a good thing either.
I’m a believer in the invisible hand of the market. A lot of people are understandably scared of the free market because of the events over the past few years. But the free market didn’t necessarily screw things up. The bankers and financiers screwed it up. They are the ones that convinced people sub-prime mortgages are OK, that credit default swaps are fool proof, that collateralized debt obligation tranches should all be rated AAA, that financial equations will defy the law of economics. I equate the free market to a motor vehicle and the bankers to a speeding driver. If the driver crashes and hurts someone you don’t blame the vehicle and through it in the landfill; you charge the driver. But at the same time, someone going 50km in a 100km zone isn’t the solution either because they are impeding the flow of traffic (I equate this slow driver to over regulation).
I agree, the incidental damage has been brutal over the past few years and its a shame that more people haven’t been charged. I hope we can all learn from this and be better off for it.
I am not sure that I agree with the premise of this article. It is good to be prudent, but looking back on interest rates only into the eighties tends to make the picture bleaker than it may actually be. The spike in interest rates in the latter part of the last century was an enormous anomaly, in a broader historical context. Will it be repeated? I’m no economist, but I don’t think the world economy can handle a drain of that magnitude again for a long, long time. Rates are super low now because too much money has been siphoned upstairs for too long. Even the plutocrats realize that you cannot get steaks and milk from the same cow indefinitely. Take a look back to the sixties, when interest rate cap legislation was gutted, to find the source of many of the economic swings we have experienced in the past forty years. Like the securities legislation put in place in the thirties (and since removed, arguably leading to the latest recession), rate cap legislation was crafted by wiser, longer-sighted men than those running the ship today. The marketplace has corrected itself, as it must, but the incidental damage has been brutal.
Thanks for your feedback Alan.
The main point I was trying to get across in this article is that when estimating how much you can afford, the current interest rates are anomalies and one shouldn’t use them to forecast for the next 5-10 years. You should see how much you can afford at a rate of 5%-7% because that seems to be about average. Maxing your mortgage payments at the historically low levels we’re seeing now is short-sighted because rates will go up. I threw the 80s example in there just to remind people that rates do go up. Plus, if you unpack that 12.65% a little bit and realize that’s only the median, then there must have been some rates above that. But yes, the 80s was an anomaly.
I take issue with rate caps being wise. I don’t think one can mess with the free market and expect no repercussions. Rate caps are only worthwhile when the lenders want to charge a high amount. Let me use an example: The cap is 9%, but everything else is yielding 11%. So lenders are only able to charge 9% on mortgages, but they see other instruments are returning 11%. They would take their money out of mortgages and put them in the other instruments. That would dry up the money left for mortgages. With less people able to buy, house prices would go down. This isn’t a good thing either.
I’m a believer in the invisible hand of the market. A lot of people are understandably scared of the free market because of the events over the past few years. But the free market didn’t necessarily screw things up. The bankers and financiers screwed it up. They are the ones that convinced people sub-prime mortgages are OK, that credit default swaps are fool proof, that collateralized debt obligation tranches should all be rated AAA, that financial equations will defy the law of economics. I equate the free market to a motor vehicle and the bankers to a speeding driver. If the driver crashes and hurts someone you don’t blame the vehicle and through it in the landfill; you charge the driver. But at the same time, someone going 50km in a 100km zone isn’t the solution either because they are impeding the flow of traffic (I equate this slow driver to over regulation).
I agree, the incidental damage has been brutal over the past few years and its a shame that more people haven’t been charged. I hope we can all learn from this and be better off for it.
Take care.
Travis Bartel