Thursday, January 24, 2008

Negative Real Interest Rates...

From today's SCMP:

"HK slips into negative interest rates. With local lenders responding to Fed cut, prime drops below inflation level of 3.8pc.
....
The result is a negative interest-rate scenario, reminiscent of the mortgage rate from 1991 to 1994. At 4 percentage points below prime, the mortgage rate now stands at between 3.1 per cent and 3.25 per cent, below the inflation rate measured at 3.8 per cent last month."

Effectively, if you have a mortgage, the Bank is now paying you, rather than the other way around! That is, you will pay back your loan in future, inclusive of interest, with less real money than the loan is worth today. And the likely result?

"Property agents said negative mortgage interest rates would help bring the market back to 1997's peak levels faster....."

Does that mean you should buy property? Not necessarily. First there are the transaction costs, that amount to about 5% of the value of the property, and then there is the risk of future property price movements. IF the US recession spreads to Asia, expect property prices to decline significantly, which would wipe out any gain from negative real interest rates many times over.

3 comments:

Anonymous said...

but what cause the real interest rate be negative?

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