Friday, January 2, 2009

Can lower interest rates spur housing market growth?

In an earlier post I wrote:
Elsewhere in Europe and the US, similar [to the Irish banks] capitalization schemes have failed to reduce the cost of corporate borrowing or to restart lending to the households. In the UK, a £43 billion capital injection scheme has been in place for almost two months and the supply of consumer and business credit continues to fall - whether due to demand slowdown, lenders withdrawal from the market or both. In the US, massive banks’ capital supports have lowered the mortgage rates, but there is no meaningful increase in new mortgages uptake.

Here is more evidence that lower rates and re-capitalizations of banks are not driving new mortgages applications up:
"British interest rates have already been slashed to 2%, their lowest level since 1951. ...Amit Kara, an economist at UBS ...expects rates to be cut to just 1% next week and to 0.5% by March. British interest rates have never gone below 2% since the central bank was created in 1694,"
"Mortgage approvals for house purchase ...fell to just 27,000 in November, the lowest level since the series began in January 1999 and a third of its level a year ago."

Ditto in the US, where (Marketwatch): "The average rate on 30-year fixed-rate mortgages fell for the ninth week in a row this week, setting another record low". The 5.1% mortgage rate recorded last week is the lowest since the data started in 1971.

Another report by the Mortgage Bankers Association (see details here) showed that the resurgence in the US mortgages issuance (155% year-on-year) on the foot of dramatic interest rates declines is accounted for by re-financing applications (83%). Of the remainder, some 2/3 of mortgages growth was due to the Federal Government purchases.

In short, the answer to the question in the title is NO.

Lower interest rates are only a part of the solution, but the paramount condition for rekindling the markets is that households must de-leverage significantly enough to bring their debt in line with their after-tax incomes. This is a lengthy and painful process that can be aided only by
  • income tax cuts or rebates (US);
  • consumption tax cuts (UK); and
  • liberal personal bankruptcy laws (US).
Even with these in place it has taken US households 6 months of straight contraction in indebtedness to start (cautiously) testing the re-mortgage market waters again.

None of these policies are even being tried in Ireland!
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