Why have worldwide mortgage rates not followed interest rates?

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Why have mortgage rates remained relatively high?Over the last few weeks we have seen a concerted effort by many governments around the world to reduce interest rates to try and refloat the worldwide economy. We’ve also seen their massive rescue packages introduced into local markets often costing hundreds of billions of dollars with the promise that they will eventually lead to better conditions for worldwide property owners. However even though interest rates have fallen markedly over the last few weeks we have yet to see any real improvement in mortgage rates even though this was promised when the rescue packages were agreed.

This is turning into a rather dangerous situation for governments around the world as many taxpayers believe that they have been duped and are seeing very little return for their substantial tax income investment. Unless governments can persuade the banking sector to “play ball” there is a real danger that many authorities around the world could lose the support of voters and eventually lose power. This more than anything seems to be focusing the mind of many government ministers at the moment although they are struggling to place any more pressure on banks around the world to pass on perceived finance cost savings to under pressure consumers.

So why are the banks not passing on reduced finance costs?

There are many reasons why the banks appear reluctant to join the party and while many taxpayers and governments may not agree there are some solid grounds for their reluctance at this point in time. Some of the factors to consider include :-

Concerns that money market liquidity will disappear

Even though the concerted effort by central banks around the world and the billions of pounds poured in via numerous rescue packages have assisted financial markets in the short term there is a concern that once this massive investment draws to a close that markets may well revert back to the difficult times of just a few months ago. If this were the case then it would be foolish of banks to take a short-term view and revert to old rates and working practices. The need to be cautious is still paramount as further reckless lending or other reckless actions could actually lead to a far worse situation in the medium to longer term.

Concerns that money market lending rates may rise

If as we suggested above money market liquidity were to disappear this would lead to a marked increase in money market lending rates which could see banks under further pressure and economies taking a further downward shift. If economies were to move lower on the lack of money market finance this would mean more bad debts, more mortgage defaults and more properties repossessed and sold on the market. This would then set in motion a self-fulfilling prophecy whereby mortgage defaults would rise futher, more homes would be repossessed and we would actually be in more serious situation than we have experienced so far.

Concerns for the worldwide employment market

In order for any mortgage customer to be able to repay their debt there is a need for the employment market around the world to be more buoyant, more secure and actually offer the potential for further growth. At this point in time there is nothing but doom and gloom in the worldwide employment market as there has always been a time lag between economic downturns and job losses. Many banks are not convinced we have even seen the start of a major downturn in the employment market and therefore they are well within their rights and sensible to hold back on offering cheaper mortgage rates to those who ultimately may not be able to afford them even in the short term. Reckless lending at this point in time would again see us in a more difficult situation than we have experienced so far.

Concerns for the worldwide property market

While those property investors in areas such as the UK and US may well feel the worst is over, in reality there are many economies around the world just starting to feel the pinch and see their property markets fall back. There is a real threat of a knock-on effect from market to market and investors to invest which could lead to more debt defaults, more write-offs and ultimately more properties for sale on the market at distressed prices.

While it would be foolish to suggest we need to see an increase in all property markets around the world it will take a marked increase in developed markets such as the UK and US to drag weaker markets higher and restore at least a modicum of confidence. Confidence is the issue in both financial and property markets and at the moment the banks have no confidence in consumers being able to repay their mortgages and consumers have no confidence in the rates at which banks are offering finance.

Government intervention

As we touched on above, governments around the world are experiencing a serious backlash from national voters and they know as do voters that their only exit route from this worsening situation is a recovery in the property market, economy and cheaper finance. It could be argued that many governments are putting their own future ahead of taxpayers who have been forced to bankroll a whole host of bailouts over the last few months. Many of these governments will not be around to ensure taxpayers receive an adequate return, if any return, so they really are playing with fire at the moment.

Summary

While the headlines and the governments around the world are putting more and more pressure on the banking system to reduce the cost of finance to consumers there is a debate as to whether now is the right time to encourage potentially reckless lending in order to prop up property markets in the short term. Even though some would argue that a short-term pickup has the potential to encourage confidence and investment this is not always the case as the current economic downturn will pray heavily on many investors mind’s for some time to come.

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