18 ms·

The Era of Very Low Inflation and Interest Rates May Be Near an End

185 points by digital55 9y ago

trustno1 9y ago
So our savings will be inflated away at an only a slightly slower pace now? How kind of the Federal Reserve!
- dang 9y ago
  Can you please not create accounts to use HN for political flamewar? This is the sort of thing we're trying to avoid here. https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
  - trustno1 9y ago
    I'm sorry, what? Everyone commenting on this article is discussing inflation.
    - dang 9y ago
      Yes, but snarky blasts of the Fed and invocations of "taxation without representation" cross out of thoughtful discussion and into ideological battle, which is an entropic state we're trying to avoid on this site.
matte_black 9y ago
I'm not familiar with a world where interest rates and inflation aren't low. What should I expect?
- deleted 9y ago
  [deleted]
- jdblair 9y ago
  Loans cost more. The interest rate on my first mortgage (in the 90's) was 7%.
  - refurb 9y ago
    Back in the 1970's a 12% interest rate on your mortgage was considered pretty good! It basically reduces buying power for real estate. Using the google mortgage calculator and assuming a $1500 max monthly payment. At a 3.92% (today) rate you can borrow ~$320K At an 8% rate you can borrow ~$200K A 38% decrease in buying power. It's already happening in Canada as the gov't is trying to slow down the real estate market by making buyer qualify at a rate 2% higher than what it is today.
    - smnrchrds 9y ago
      > as the gov't is trying to slow down the real estate market This is not the reason for mortgage stress test, just one of its effects. The main reason for the regulation is to avoid a tsunami of bankruptcies when interest rates eventually increase.
      - encoderer 9y ago
        These are not fixed rate loans?
        winthrowe 9y ago
        You can't really get a rate fixed over the entire amortization period in Canada, our 'fixed rate' mortgages are a 5 year lockin typically.
        kylemuir 9y ago
        When those fixed rates end and they have to refix a ton of overleveraged people will force mortgagee sales. In Auckland there's been talk of that for at least 5-6 years. For example, people I personally know only earn $80-90k/yr and yet own a $500k house (absolute entry level livable house in Auckland). They also got in under our old rules which meant they only needed 5% deposit instead of the 20% required now. They're only being propped up by their record low interest rates. If those interest rates went up 2-3% they'd be in serious trouble. EDIT: for more context the average fixed period for any home loan in NZ is roughly 2-3 yrs. The term is a 30 year term typically.
- trustno1 9y ago
  > inflation aren't low Inflation is only low if you trust how the Federal Reserve is calculating it. Personally, I think the weightings they assign to various categories are intentionally incorrect. Anyone who lived through 2008 knows better than to think inflation was sub-2% -- yet many savings accounts have been paying 0.01% interest for over a decade. The fed's monetary policy is taxation without representation.
  - dannyw 9y ago
    The Fed doesn’t calculate CPI, but CPI ‘adjustments’ are indeed fundamentally cherry picked to lower the rate. There are a bunch of crazy mechanics like “hedonistic substitution”, min() functions, and adjustments that by definition can only adjust the rate down and not up (eg ‘quality increase’ in basket of goods = adjust CPI down by the ‘quality increase factor’, but quality decrease does not adjust CPI upwards). People use the million prices project to argue CPI is correct, but misses the point that the project uses a regresssion model to automatically multiply their index by an adjustment factor to match CPI - and that adjustment factor has only gotten smaller and smaller (ie their index reports higher inflation growth than CPI) as time went on.
- samsonradu 9y ago
  Me neither, but I tend to think we'll not find out very soon. The article is heavily biased towards the US economy, meanwhile the EU, Japan still struggle with ~0% yields. Hell, Japan's been doing it since 1992.
- adventured 9y ago
  It's almost guaranteed we are not leaving a world of low interest rates (vs historical norms of the past 30 or 50 years). Most of the global economy is loaded up on debt: Japan, China, the US, large parts of Europe. These days it's the exception when a country has a modest debt context, whether at the government level, corporate level, or household level. Countries that we normally think of as very well off, such as Denmark, Sweden and the Netherlands are among the most indebted people on earth in terms of household debt to income. They can't afford much higher interest rates at all, it would collapse their housing markets and shatter their household finances. Australia is in the same boat, two years ago nearly 1/2 of all new Australian mortgages were interest only mortgages; over the last 10 years, the average has been about 35% of all new Australian mortgages have been interest only (in a nation where their housing market is 4x the size of the economy; by comparison, the US housing market is 1.5x the size of its economy). As of a year ago, in total around 39% of all outstanding Australian residential loan balances were interest only. [1] For those that recall the US real-estate bubble, that's a terrifying figure; the US interest-only share of the market during the crazy years of the real-estate bubble was single digits (5-8%). Australia is currently taking action to try to counter this, which is rocking their market presently. [2] The solid gains Canada made in their household wealth figures over the last decade? Almost entirely from their real estate bubble, which has produced a housing market that as a % of GDP is 2/3 larger than that of the US (the Canadian housing market is 2.5x the size of their economy, up from about 1.6x in 2007). They also can't afford significantly higher interest rates. New Zealand is similar to Australia, their housing market is 4x the size of their economy. The UK's housing market is 3x the size of their economy, or twice the ratio of the US. These countries are all fragile when it comes to higher interest rates on mortgages. Even the Swiss are in terrible shape, their household debt as a percentage of GDP is 50% higher than the US ratio. In the US, its households are in reasonably good shape on debt; US household debt to income figures are the best they've been in decades, essentially the lowest the US has on modern record. Its corporations have loaded up on debt over the last ten years, and of course the Federal Government has taken on immense debt over the same span of time. The US Government simply can't afford 4-5% interest rates on its soon to be $30 trillion in public debt; which is another way of saying: in the US we are never returning to normal interest rates, not under any circumstances. The Fed will go into perpetual QE mode, as Japan has, to guarantee that. Germany is a particular stand-out among high income nations when it comes to having low government debt, no real estate bubble, and no serious household debt to income ratio problem. [1] https://i.imgur.com/2Z0mzou.png https://i.imgur.com/2Z0mzou.png [2] https://www.bloomberg.com/news/articles/2018-04-15/tougher-lending-standards-put-australia-property-on-shaky-ground https://www.bloomberg.com/news/articles/2018-04-15/tougher-l...
- cyberferret 9y ago
  I recall a time of nearly 20% interest rates here in Australia a few decades ago. As far as I can remember, it was all just business as normal for most people. It all comes down to just how much debt you own. If I recall, people who were highly leveraged or had negatively geared property were hit the hardest. People with actual savings in the bank were actually happy with their interest returns being so high. Household debt was not as bad back then as it is nowadays, so I don't expect it to go as well if we ever hit those levels again tomorrow.
  - anon84598 9y ago
    It's worth noting that most Australian mortgages use variable (i.e., non-fixed) interest rates, so when rates go up, everyone's payment increases. High interest rates in the US are beneficial to mortgage holders because most people use fixed-rate loans which means as inflation increases, your monthly payment decreases in real value.
    - kazinator 9y ago
      No such thing as fixed rate: fixed rate just means "variable, but in 3 or 5 year (or whatever) increments". The interest is a bar graph with bars that are several years wide, instead of a graph with one-month-wide bars. Fixed rates are not free; you pay extra for the fixing. The longer the fixing, the more you pay. It only makes sense to go fixed rate if you're very sure that the interest will climb over the next term. Not only that, that it will climb sufficiently enough to offset the cost of locking into the fixed rate so you still come out ahead. Once that term is up, you're no longer locked in; so you have to re-evaluate everything at the start of the next term. (You don't have to do this upfront, either; variable rate mortgages have the option to switch to fixed for the remainder of the term.) Anyway, people who go for fixed rate mortgages end up paying tens of thousands of dollars extra over the life of a mortgage, unless they are somehow able to game things in periods of rising interest. When I was signing up for a mortgage, the financial institution offered to cover the lawyer's fees for all the paperwork, running into the hundreds of dollars. That offer was quickly rescinded when it became apparent that I'm declining the fixed term mortgage and opting for variable. That's obviously because the fixed term is good for them; that's why they incentivized it. When some aspect of a deal is good for you, it's never incentivized.
- mathattack 9y ago
  Much higher mortgage payments. Run the math on a mortgage with 4% interest vs 8%.
  - toasterlovin 9y ago
    My intuitive sense is that it should destroy the real estate market. Anything that I'm missing in that analysis?
    - matwood 9y ago
      Depends on how fast it rises, and if wages can keep up. Obviously the slower the better. But yeah, the optimal time to buy RE is when rates are high and then refi when they drop.
    - mhewett 9y ago
      History. In the late 1970s you could get 17% return on your savings account and mortgage rates were well above 10%. People still bought houses.
      - toasterlovin 9y ago
        I'm not talking about a steady state. I'm talking about the transition from a low interest rate regime to a high interest rate regime.
      - kazinator 9y ago
        If someone barely qualified for a mortgage in a 2% environment, and now suddenly is faced with 10%, that's a bit of a shakedown.
        djrogers 9y ago
        Nobody, anywhere, ever, in the history of this topic, has suggested the fed would raise rates such that rates would 'suddenly' jump to 10%. That's the straw-iest of straw-men.
    - 9y ago
- baybal2 9y ago
  We live in weird time. If rates were to hit 80ies era level, 1 out of every 3 countries will default. For this reason they wouldn't. I thank myself for making a decision in my teenage years to keep half of my savings in metals. It was unbelievably wise for a 15 years old me.
  - matwood 9y ago
    > If rates were to hit 80ies era level, 1 out of every 3 country will default. Huh? Are you saying 1/3 of mortgages are variable rate?
    - baybal2 9y ago
      I'm talking about government debt, not private. Though, a chain reaction , if it is to happen, will reach pretty much all and everything including private mortgages. If you have a fixed rate one, you may well read the fine script better. Quite a few banks put a no reservations callback clause in the loan agreement. If an individual gets his mortgage called back, for an average Joe the only way to get through that would be to get another loan, and at a higher rate.
- dredmorbius 9y ago
  Debt becomes more expensive. If interest rates go very high, that can be crippling. That's probably unlikely. There will likely be less money pursuing assets (real estate may be affected), and business ventures (start-ups). Given trends of the past decade, both are likely healthy changes, though SV types may be impacted.
- lrem 9y ago
  Imagine this was done quickly: 1: everyone who's got a borderline repayable mortgage to get anything in the overheated market and hasn't increased earnings by some 20-30% since then goes bust. This creates a wave of increased supply. 2: everyone's willing to buy gets way less loan amount for same repayments. This severely reduces demand at current prices. 3: 1+2 force prices down, meaning some people end up owning banks more than their house is worth. In the US the banks are in trouble, as people start walking away from their mortgages. In the EU such people are stuck with negative equity. Such a scenario is outright disastrous, so no sane government will try it. So, the only way out of low rates is to increase this gradually enough to not create visible waves. Which means all 3 happen, but at a magnitude where most people do not notice.
  - cortesoft 9y ago
    Wait, isn't your number 1 the exact opposite, unless you got a variable rate mortgage? If you got a fixed rate mortgage, inflation is your friend, since inflation will decrease your debt.
    - mattmanser 9y ago
      In the UK mortgages aren't fixed for the lifetime of the mortgage. Not sure about the rest of the EU. Ours are like 3/4/5 year fixed rate then revert to a bad variable rate, at which point you get a new mortgage.
      - Xylakant 9y ago
        In Germany, 10 year fixed mortgages are common, though shorter terms get you lower interest.
        eCa 9y ago
        In Sweden, lots of mortgages are adjusted every three months, and I would assume (though not certain) that a majority of mortgages are fixed on no more than two-three years.
- skookumchuck 9y ago
  A lot of misinformation and propaganda about the cause of it. See the 1970's in America. (Usually, greedy businessmen, greedy unions, and speculators are blamed.)
- cs702 9y ago
  For starters, the present value of all long-lived assets will come down -- stocks, bonds, real estate, you name it. As Warren Buffett explains: "[Interest rates] act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That's because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate. Consequently, every time the risk-free rate moves by one basis point--by 0.01%--the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect--like the invisible pull of gravity--is constantly there." Source: "Mr. Buffett on the Stock Market," November 22, 1999 -- http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm http://archive.fortune.com/magazines/fortune/fortune_archive...
  - deleted 9y ago
    [deleted]
  - HillaryBriss 9y ago
    > the present value of all long-lived assets will come down we can consider 'value' but also recognize that actual market price is another thing. real estate prices can continue to go up and at times actually have gone up in environments where interest rates were rising. as Buffet points out, there are additional important variables.
  - adrianratnapala 9y ago
    While this make sense, I must put my skeptical-of-all-economics hat on when I see this: > People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In [other cases], other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. In the case of bonds, it is just a mathematical identity, since the the interest rate can be nothing other than a relation between the face value and current price. In all the non-tautological cases, Buffet admits that the effect is "obscured". Which is to say that it is just another reasonable sounding humanities-theory that is difficult to check empirically.
- Lerc 9y ago
  It always amused me that the thing that dated Die Hard so much was this line “When they touch down, we'll blow up the roof, they'll spend a month sifting through rubble, and by the time they work out what went wrong, we'll be sitting on a beach, earning twenty percent. Of all of the crazy things in the film, Twenty percent seems the most unimaginable to people who have only experienced recent times.
- Taniwha 9y ago
  people who have leveraged themselves to the hilt to buy expensive real estate and are just managing to pay the mortgage will be screwed, when their monthly payment doubles or triples they'll have to unload, at the same time as everyone else in the same position depressing the market - there will be crying, the gnashing of teeth, and bankruptcies among those who don't sell quickly enough. Remember your parents bought their house and paid these higher interest rates, house prices were lower than now partly because people could only afford so much of a mortgage. If you live in the US, where you can lock in a 30yr rate, and you haven't you need to do it now, if you live in the rest of the world where mostly you can't you're screwed
- SamBam 9y ago
  All of a sudden the idea of having a "savings account" along side your "checking account," and buying "CDs" will make a whole lot more sense. The average savings account interests are currently around 0.02% APY. Those kinds of numbers make savings accounts meaningless--people just use them as a second account to help their budgeting. CDs are not much better, at 2.5% for a 5-year. Compare that to 8% APY for savings accounts and 12% APY 5-year CDs in the 1980s, and you'll understand why they exist at all. People actually had a reason to chose interest-bearing savings accounts.
  - ataturk 9y ago
    Sometime in the early '90s I remember my GF's dad boasting about a 5-year CD he got with a 15% rate. Yeah. It was a weird time and I don't feel like it was a very prosperous time. California had a major housing bust in the early '90s. The Clinton years kinda sucked, honestly.
samsonradu 9y ago
> So as long as the moves don’t go too far, increases in inflation and interest rates would be a sign the global economy is returning to a more prosperous equilibrium like the one that prevailed before 2008. Pre-2008 was quite far from a prosperous equilibrium, otherwise it wouldn't have caused the crisis.
- wuliwong 9y ago
  It is pretty shocking for someone to consider the years leading up to 2008 as being in equilibrium, economically.
- tribune 9y ago
  I don't think it means the immediate time before 2008, but rather the generally prosperous post-WWII era
elvirs 9y ago
I am not buying that inflation is low. Property taxes and housing cost (especially rent) has doubled in last 10 years in New York. I think so has the medical costs. Just because gas prices are low dose not mean inflation is low
- samsonradu 9y ago
  Housing is not included in the CPI I believe. https://economics.stackexchange.com/questions/4777/why-arent-house-prices-included-in-cpi https://economics.stackexchange.com/questions/4777/why-arent...
  - txsh 9y ago
    You’re right. Housing isn’t a consumer good. But CPI does fail to measure inflation in consumer goods. I agree with op that there has been inflation for years.
  - elvirs 9y ago
    CPI does not include rent but thats what more than half of average couples combined income is spent on. (Couple with full time $15 per hour jobs living in $2000 per month apartment)
    - BenoitEssiambre 9y ago
      It includes rent just not house prices because house prices reflect investment (cost of consumption in the future) more than immediate consumption. House prices are converted to a kind of rent equivalent before being included in CPI.
    - dragonwriter 9y ago
      > CPI does not include rent CPI includes both rent costs for actual rentals and imputed rent for owner occupied housing. [0] > but thats what more than half of average couples combined income is spent on. More like a quarter. [1] [0] https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.pdf https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an... [1] https://www.bls.gov/news.release/cesan.nr0.htm https://www.bls.gov/news.release/cesan.nr0.htm
MrEldritch 9y ago
"And if threats of a trade war with China or other countries turn into reality, this will tend to increase inflation, driving up prices both directly through new tariffs on imported goods and indirectly by encouraging less efficient production." ...I'm confused as to why either of those effects are supposed to be good things.
- craftyguy 9y ago
  Those aren't the 'good things' that trade wars are supposed to bring. Some people believe trade wars bolster local economies, by giving local manufacturers a price advantage for their goods.. thereby increasing demand for local products and "increasing jobs". I don't think it has ever worked out that way, despite all the rhetoric.
  - simonh 9y ago
    Quite. Since those locally produced goods are more expensive (otherwise they’d have been locally produced already), everybody buying them now has less money to spend on anything else, reducing consumption and hitting the rest of the economy. Then you’re trapped, because if you try to unwind the damage, those jobs you did create go away again.
tanderson92 9y ago
> The shift looks to be driven mostly by a rise in investors’ expectations for future inflation. In the United States, prices of inflation-protected bonds imply that investors currently expect consumer prices to rise 2.09 percent annually over the next five years, up from 1.65 percent expected in September. This claim that the shift is due to inflation expectations is inconsistent with the data. Most of the rate increases has been due to real interest rate increases, unless I am missing something which I don't think I am. source: https://fred.stlouisfed.org/series/T5YIE https://fred.stlouisfed.org/series/T5YIE, https://fred.stlouisfed.org/series/DGS5 https://fred.stlouisfed.org/series/DGS5
- deleted 9y ago
  [deleted]
- pishpash 9y ago
  It has been both, about half and half.
  - tanderson92 9y ago
    Right, so I don't understand the confidence with which the reporter is mentioning only one and implicitly attributing the rise exclusively to it. Even if you use 50% of the effect as being due to one or the other as the threshold, it's actually been more due to real interest rate increases (only 55-60% so you're right it's like half and half), so the piece is just really baffling.
deleted 9y ago
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rmrm 9y ago
In a world where inflation is going to go up, what should one invest in? People will often say gold. Which I guess is a proxy for any fixed supply asset. But weve seen price inflation in many things other than gold, such as houses and land, art, stock prices. Most things of lasting value ie not consumables. Does a precious metal have some other special qualities that make it behave poorly relative to other limited valuable assests, and then well? What say you HN? Whats the play to protect ones assets? Or does one just need to avoid cash and bonds?
- toss1 9y ago
  From what I've read, gold and other PM generally perform inversely to real interest rates (vs nominal FED rates). This somewhat makes sense, as gold has a carrying cost (storage, security, etc.) and earns no interest, whereas when real interest rates are high, the money will produce better yield in bonds and similar investments. In a situation of runaway inflation, nominal interest rates are insane also (I've seen double-digit percentages per month in one hyperinflation event in a country I visited), but the real inflation is likely even faster, making real interest negative.
- downrightmike 9y ago
  Investing in the total market: vtsax because yes it will crash, but it will also recover.
- dredmorbius 9y ago
  A diversified portfolio.
- qazwsxedchac 9y ago
  Precious metal, if held in physical form, has the unique property of being no-one's obligation. Additionally, it is by definition a bearer "instrument" and easily transportable, therefore suitable for mitigating political risk. This is why it performs well in times of crisis. There is no one-size-fits-all answer to your second and further questions. Too much depends on individual circumstances, risk appetite and time horizon.
  - 9y ago
lewis500 9y ago
"if threats of a trade war with China or other countries turn into reality, this will tend to increase inflation, driving up prices both directly through new tariffs on imported goods and indirectly by encouraging less efficient production." I wouldn't call this "inflation" in the sense economists mean it. This could cause a one-time rise in prices, but it would not necessarily mean permanent change in the rate prices go up each year. Maybe some of yall would like this federal reserve simulator I made last year: http://lewis500.github.io/macro/ http://lewis500.github.io/macro/ It is one of my least popular explorable explanation but also one of my favorites.
davewritescode 9y ago
Housing market should cool off bit. When people buy houses, they look almost exclusively at the monthly payment which includes interest, taxes and insurance. The FED will raise rates slowly to avoid crashing the economy
SCAQTony 9y ago
Hopefully wages rise with the Consumer Price Index (CPI). Arguably for the back-half of income earners this has not happened for decades. If we experience the same consumer price increases as was experienced through 1980-1990, rents and goods will go up an average of 5.4% each year over a 10-year period. If it gets as bad as the 1970-1980 CPI then rents, goods and services will rise almost 7.1% a year and will practically double after a 10-year period. Here are the historical CPI numbers from 1913 to 2017 —(1970 to 1980 was not pretty.) https://www.minneapolisfed.org/community/financial-and-economic-education/cpi-calculator-information/consumer-price-index-and-inflation-rates-1913 https://www.minneapolisfed.org/community/financial-and-econo...
- lawtguy 9y ago
  In the US, the combination of globalization, automation and lack of support for private sector unions means workers outside of the creative class have very little bargaining power. I'm sure workers will get raises, but I don't see much hope for them getting much above the inflation rate. The only political solution that seems to be getting any traction at all is raising the minimum wage. Some states are doing that, but I don't see the Federal minimum wage getting raised any time soon.
  - RickJWagner 9y ago
    Agreed.
  - simonh 9y ago
    That just puts the crush on the sectors that Offer low wage jobs, increasing their costs and the prices they must charge their customers. The people who do get those jobs earn more, but there will be fewer of them, making the poverty trap even deeper. I’m beginning to think a low Basic Income might help, maybe as little as a hundred bucks a month. The problem with current BI tests is they are Big Bang experiments - big basic incomes for a tiny number of people. However a relatively low BI combined with moderate minimum wages could effectively act as a subsidy on low paying jobs. It would have to be funded by a tax increase, but a relatively modest one. This should make more low paying jobs viable to offer, make them more economically attractive to workers in terms of total earnings, and make the businesses that employ people on low wages more price competitive, increasing low wage employment. All without the massive distortions to the economy a high BI could cause. This approach to BI wouldn’t free everybody up to become artists and explorers, but that was always a fantasy anyway. Somebody has to do the productive work somewhere, the trick is to make that work progressively more secure and rewarding.
tunesmith 9y ago
Still having trouble figuring out of being a landlord of a second home is good or bad in this environment. You owe a fixed-rate mortgage, and you're charging rent.
- msegal 9y ago
  Rents will increase, your mortgage will not if you're locked in. The resale value of your house will be pushed down by reduced affordability, but pushed up by higher rents and cost of goods. Ultimately owning a hard asset in an inflationary period is a good idea.
  - debacle 9y ago
    The value of most residential property is tied to demand, and demand is tied to interest rates and ability to borrow. If most people can't borrow 300k+, most houses are going to see a drop in value.
- harry8 9y ago
  If the real value of the residential property in future sale price and rent received goes absolutely nowhere. Having it mortgaged will cause you to win big. Stupid example, say inflation goes to 7% year on year. Your house is say $100,000 totally financed by debt. You pay interest only on your loan. 10 years time, your loan is $100,000 and is worth $50,000 in 2018 dollars due to the inflation. If you have a 0% real return on the value of your house you can sell it for $200,000 in 2028. A nominal return of 100% over 10 years even with zero increase in real value of the house. So if you have a good investment property it will go really well. But if you have something that becomes a future slum, you can still lose.
  - djrogers 9y ago
    That completely ignores the downward pressure on home prices that a high interest rate has. Inflation at 7% would be tied to significantly higher interest rates, which would reduce the buying power of potential buyers, which reduces home prices. Leaving aside all the mechanics of timing the market such that you have a huge, low interest, fixed rate mortgage in hand when inflation magically jumps to 7%.
RickJWagner 9y ago
Ugh. Higher interest rates and inflation will work against those on the lower end of the poverty scale. (Yes, wages will go up. But not enough to match increases in the price of goods.) Those who need to borrow will fall even farther behind. Low inflation and rates isn't ideal, but it's probably the best scenario when there is a big difference between high and low economic ends.
neilwilson 9y ago
They've been saying that about Japan for decades. Still waiting.
- graeme 9y ago
  I think some people have predicted that Japan's rates might rise in the long run. Has anyone serious made predictions of a near end to Japan's current period?
s2g 9y ago
So will this cool the market and cause housing prices to become less incredibly insane, or will it just make things more expensive. I'm gonna guess the latter because god forbid something good happens to my generation.
jacksmith21006 9y ago
Not convinced. Was talking to my 20 year old kid and was thinking he has never seen anything but crazy low interest rates for his entire life. But I just do NOT believe things are going to change. Guess we will see.

185 points by digital55 9y ago

trustno1 9y ago

So our savings will be inflated away at an only a slightly slower pace now? How kind of the Federal Reserve!

dang 9y ago
Can you please not create accounts to use HN for political flamewar? This is the sort of thing we're trying to avoid here. https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
- trustno1 9y ago
  I'm sorry, what? Everyone commenting on this article is discussing inflation.
  - dang 9y ago
    Yes, but snarky blasts of the Fed and invocations of "taxation without representation" cross out of thoughtful discussion and into ideological battle, which is an entropic state we're trying to avoid on this site.

matte_black 9y ago

I'm not familiar with a world where interest rates and inflation aren't low. What should I expect?

deleted 9y ago
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jdblair 9y ago
Loans cost more. The interest rate on my first mortgage (in the 90's) was 7%.
- refurb 9y ago
  Back in the 1970's a 12% interest rate on your mortgage was considered pretty good! It basically reduces buying power for real estate. Using the google mortgage calculator and assuming a $1500 max monthly payment. At a 3.92% (today) rate you can borrow ~$320K At an 8% rate you can borrow ~$200K A 38% decrease in buying power. It's already happening in Canada as the gov't is trying to slow down the real estate market by making buyer qualify at a rate 2% higher than what it is today.
  - smnrchrds 9y ago
    > as the gov't is trying to slow down the real estate market This is not the reason for mortgage stress test, just one of its effects. The main reason for the regulation is to avoid a tsunami of bankruptcies when interest rates eventually increase.
    - encoderer 9y ago
      These are not fixed rate loans?
      - winthrowe 9y ago
        You can't really get a rate fixed over the entire amortization period in Canada, our 'fixed rate' mortgages are a 5 year lockin typically.
      - kylemuir 9y ago
        When those fixed rates end and they have to refix a ton of overleveraged people will force mortgagee sales. In Auckland there's been talk of that for at least 5-6 years. For example, people I personally know only earn $80-90k/yr and yet own a $500k house (absolute entry level livable house in Auckland). They also got in under our old rules which meant they only needed 5% deposit instead of the 20% required now. They're only being propped up by their record low interest rates. If those interest rates went up 2-3% they'd be in serious trouble. EDIT: for more context the average fixed period for any home loan in NZ is roughly 2-3 yrs. The term is a 30 year term typically.
trustno1 9y ago
> inflation aren't low Inflation is only low if you trust how the Federal Reserve is calculating it. Personally, I think the weightings they assign to various categories are intentionally incorrect. Anyone who lived through 2008 knows better than to think inflation was sub-2% -- yet many savings accounts have been paying 0.01% interest for over a decade. The fed's monetary policy is taxation without representation.
- dannyw 9y ago
  The Fed doesn’t calculate CPI, but CPI ‘adjustments’ are indeed fundamentally cherry picked to lower the rate. There are a bunch of crazy mechanics like “hedonistic substitution”, min() functions, and adjustments that by definition can only adjust the rate down and not up (eg ‘quality increase’ in basket of goods = adjust CPI down by the ‘quality increase factor’, but quality decrease does not adjust CPI upwards). People use the million prices project to argue CPI is correct, but misses the point that the project uses a regresssion model to automatically multiply their index by an adjustment factor to match CPI - and that adjustment factor has only gotten smaller and smaller (ie their index reports higher inflation growth than CPI) as time went on.
samsonradu 9y ago
Me neither, but I tend to think we'll not find out very soon. The article is heavily biased towards the US economy, meanwhile the EU, Japan still struggle with ~0% yields. Hell, Japan's been doing it since 1992.
adventured 9y ago
It's almost guaranteed we are not leaving a world of low interest rates (vs historical norms of the past 30 or 50 years). Most of the global economy is loaded up on debt: Japan, China, the US, large parts of Europe. These days it's the exception when a country has a modest debt context, whether at the government level, corporate level, or household level. Countries that we normally think of as very well off, such as Denmark, Sweden and the Netherlands are among the most indebted people on earth in terms of household debt to income. They can't afford much higher interest rates at all, it would collapse their housing markets and shatter their household finances. Australia is in the same boat, two years ago nearly 1/2 of all new Australian mortgages were interest only mortgages; over the last 10 years, the average has been about 35% of all new Australian mortgages have been interest only (in a nation where their housing market is 4x the size of the economy; by comparison, the US housing market is 1.5x the size of its economy). As of a year ago, in total around 39% of all outstanding Australian residential loan balances were interest only. [1] For those that recall the US real-estate bubble, that's a terrifying figure; the US interest-only share of the market during the crazy years of the real-estate bubble was single digits (5-8%). Australia is currently taking action to try to counter this, which is rocking their market presently. [2] The solid gains Canada made in their household wealth figures over the last decade? Almost entirely from their real estate bubble, which has produced a housing market that as a % of GDP is 2/3 larger than that of the US (the Canadian housing market is 2.5x the size of their economy, up from about 1.6x in 2007). They also can't afford significantly higher interest rates. New Zealand is similar to Australia, their housing market is 4x the size of their economy. The UK's housing market is 3x the size of their economy, or twice the ratio of the US. These countries are all fragile when it comes to higher interest rates on mortgages. Even the Swiss are in terrible shape, their household debt as a percentage of GDP is 50% higher than the US ratio. In the US, its households are in reasonably good shape on debt; US household debt to income figures are the best they've been in decades, essentially the lowest the US has on modern record. Its corporations have loaded up on debt over the last ten years, and of course the Federal Government has taken on immense debt over the same span of time. The US Government simply can't afford 4-5% interest rates on its soon to be $30 trillion in public debt; which is another way of saying: in the US we are never returning to normal interest rates, not under any circumstances. The Fed will go into perpetual QE mode, as Japan has, to guarantee that. Germany is a particular stand-out among high income nations when it comes to having low government debt, no real estate bubble, and no serious household debt to income ratio problem. [1] https://i.imgur.com/2Z0mzou.png https://i.imgur.com/2Z0mzou.png [2] https://www.bloomberg.com/news/articles/2018-04-15/tougher-lending-standards-put-australia-property-on-shaky-ground https://www.bloomberg.com/news/articles/2018-04-15/tougher-l...
cyberferret 9y ago
I recall a time of nearly 20% interest rates here in Australia a few decades ago. As far as I can remember, it was all just business as normal for most people. It all comes down to just how much debt you own. If I recall, people who were highly leveraged or had negatively geared property were hit the hardest. People with actual savings in the bank were actually happy with their interest returns being so high. Household debt was not as bad back then as it is nowadays, so I don't expect it to go as well if we ever hit those levels again tomorrow.
- anon84598 9y ago
  It's worth noting that most Australian mortgages use variable (i.e., non-fixed) interest rates, so when rates go up, everyone's payment increases. High interest rates in the US are beneficial to mortgage holders because most people use fixed-rate loans which means as inflation increases, your monthly payment decreases in real value.
  - kazinator 9y ago
    No such thing as fixed rate: fixed rate just means "variable, but in 3 or 5 year (or whatever) increments". The interest is a bar graph with bars that are several years wide, instead of a graph with one-month-wide bars. Fixed rates are not free; you pay extra for the fixing. The longer the fixing, the more you pay. It only makes sense to go fixed rate if you're very sure that the interest will climb over the next term. Not only that, that it will climb sufficiently enough to offset the cost of locking into the fixed rate so you still come out ahead. Once that term is up, you're no longer locked in; so you have to re-evaluate everything at the start of the next term. (You don't have to do this upfront, either; variable rate mortgages have the option to switch to fixed for the remainder of the term.) Anyway, people who go for fixed rate mortgages end up paying tens of thousands of dollars extra over the life of a mortgage, unless they are somehow able to game things in periods of rising interest. When I was signing up for a mortgage, the financial institution offered to cover the lawyer's fees for all the paperwork, running into the hundreds of dollars. That offer was quickly rescinded when it became apparent that I'm declining the fixed term mortgage and opting for variable. That's obviously because the fixed term is good for them; that's why they incentivized it. When some aspect of a deal is good for you, it's never incentivized.
mathattack 9y ago
Much higher mortgage payments. Run the math on a mortgage with 4% interest vs 8%.
- toasterlovin 9y ago
  My intuitive sense is that it should destroy the real estate market. Anything that I'm missing in that analysis?
  - matwood 9y ago
    Depends on how fast it rises, and if wages can keep up. Obviously the slower the better. But yeah, the optimal time to buy RE is when rates are high and then refi when they drop.
  - mhewett 9y ago
    History. In the late 1970s you could get 17% return on your savings account and mortgage rates were well above 10%. People still bought houses.
    - toasterlovin 9y ago
      I'm not talking about a steady state. I'm talking about the transition from a low interest rate regime to a high interest rate regime.
    - kazinator 9y ago
      If someone barely qualified for a mortgage in a 2% environment, and now suddenly is faced with 10%, that's a bit of a shakedown.
      - djrogers 9y ago
        Nobody, anywhere, ever, in the history of this topic, has suggested the fed would raise rates such that rates would 'suddenly' jump to 10%. That's the straw-iest of straw-men.
  - 9y ago
baybal2 9y ago
We live in weird time. If rates were to hit 80ies era level, 1 out of every 3 countries will default. For this reason they wouldn't. I thank myself for making a decision in my teenage years to keep half of my savings in metals. It was unbelievably wise for a 15 years old me.
- matwood 9y ago
  > If rates were to hit 80ies era level, 1 out of every 3 country will default. Huh? Are you saying 1/3 of mortgages are variable rate?
  - baybal2 9y ago
    I'm talking about government debt, not private. Though, a chain reaction , if it is to happen, will reach pretty much all and everything including private mortgages. If you have a fixed rate one, you may well read the fine script better. Quite a few banks put a no reservations callback clause in the loan agreement. If an individual gets his mortgage called back, for an average Joe the only way to get through that would be to get another loan, and at a higher rate.
dredmorbius 9y ago
Debt becomes more expensive. If interest rates go very high, that can be crippling. That's probably unlikely. There will likely be less money pursuing assets (real estate may be affected), and business ventures (start-ups). Given trends of the past decade, both are likely healthy changes, though SV types may be impacted.
lrem 9y ago
Imagine this was done quickly: 1: everyone who's got a borderline repayable mortgage to get anything in the overheated market and hasn't increased earnings by some 20-30% since then goes bust. This creates a wave of increased supply. 2: everyone's willing to buy gets way less loan amount for same repayments. This severely reduces demand at current prices. 3: 1+2 force prices down, meaning some people end up owning banks more than their house is worth. In the US the banks are in trouble, as people start walking away from their mortgages. In the EU such people are stuck with negative equity. Such a scenario is outright disastrous, so no sane government will try it. So, the only way out of low rates is to increase this gradually enough to not create visible waves. Which means all 3 happen, but at a magnitude where most people do not notice.
- cortesoft 9y ago
  Wait, isn't your number 1 the exact opposite, unless you got a variable rate mortgage? If you got a fixed rate mortgage, inflation is your friend, since inflation will decrease your debt.
  - mattmanser 9y ago
    In the UK mortgages aren't fixed for the lifetime of the mortgage. Not sure about the rest of the EU. Ours are like 3/4/5 year fixed rate then revert to a bad variable rate, at which point you get a new mortgage.
    - Xylakant 9y ago
      In Germany, 10 year fixed mortgages are common, though shorter terms get you lower interest.
      - eCa 9y ago
        In Sweden, lots of mortgages are adjusted every three months, and I would assume (though not certain) that a majority of mortgages are fixed on no more than two-three years.
skookumchuck 9y ago
A lot of misinformation and propaganda about the cause of it. See the 1970's in America. (Usually, greedy businessmen, greedy unions, and speculators are blamed.)
cs702 9y ago
For starters, the present value of all long-lived assets will come down -- stocks, bonds, real estate, you name it. As Warren Buffett explains: "[Interest rates] act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That's because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate. Consequently, every time the risk-free rate moves by one basis point--by 0.01%--the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect--like the invisible pull of gravity--is constantly there." Source: "Mr. Buffett on the Stock Market," November 22, 1999 -- http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm http://archive.fortune.com/magazines/fortune/fortune_archive...
- deleted 9y ago
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- HillaryBriss 9y ago
  > the present value of all long-lived assets will come down we can consider 'value' but also recognize that actual market price is another thing. real estate prices can continue to go up and at times actually have gone up in environments where interest rates were rising. as Buffet points out, there are additional important variables.
- adrianratnapala 9y ago
  While this make sense, I must put my skeptical-of-all-economics hat on when I see this: > People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In [other cases], other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. In the case of bonds, it is just a mathematical identity, since the the interest rate can be nothing other than a relation between the face value and current price. In all the non-tautological cases, Buffet admits that the effect is "obscured". Which is to say that it is just another reasonable sounding humanities-theory that is difficult to check empirically.
Lerc 9y ago
It always amused me that the thing that dated Die Hard so much was this line “When they touch down, we'll blow up the roof, they'll spend a month sifting through rubble, and by the time they work out what went wrong, we'll be sitting on a beach, earning twenty percent. Of all of the crazy things in the film, Twenty percent seems the most unimaginable to people who have only experienced recent times.
Taniwha 9y ago
people who have leveraged themselves to the hilt to buy expensive real estate and are just managing to pay the mortgage will be screwed, when their monthly payment doubles or triples they'll have to unload, at the same time as everyone else in the same position depressing the market - there will be crying, the gnashing of teeth, and bankruptcies among those who don't sell quickly enough. Remember your parents bought their house and paid these higher interest rates, house prices were lower than now partly because people could only afford so much of a mortgage. If you live in the US, where you can lock in a 30yr rate, and you haven't you need to do it now, if you live in the rest of the world where mostly you can't you're screwed
SamBam 9y ago
All of a sudden the idea of having a "savings account" along side your "checking account," and buying "CDs" will make a whole lot more sense. The average savings account interests are currently around 0.02% APY. Those kinds of numbers make savings accounts meaningless--people just use them as a second account to help their budgeting. CDs are not much better, at 2.5% for a 5-year. Compare that to 8% APY for savings accounts and 12% APY 5-year CDs in the 1980s, and you'll understand why they exist at all. People actually had a reason to chose interest-bearing savings accounts.
- ataturk 9y ago
  Sometime in the early '90s I remember my GF's dad boasting about a 5-year CD he got with a 15% rate. Yeah. It was a weird time and I don't feel like it was a very prosperous time. California had a major housing bust in the early '90s. The Clinton years kinda sucked, honestly.

samsonradu 9y ago

> So as long as the moves don’t go too far, increases in inflation and interest rates would be a sign the global economy is returning to a more prosperous equilibrium like the one that prevailed before 2008. Pre-2008 was quite far from a prosperous equilibrium, otherwise it wouldn't have caused the crisis.

wuliwong 9y ago
It is pretty shocking for someone to consider the years leading up to 2008 as being in equilibrium, economically.
tribune 9y ago
I don't think it means the immediate time before 2008, but rather the generally prosperous post-WWII era

elvirs 9y ago

I am not buying that inflation is low. Property taxes and housing cost (especially rent) has doubled in last 10 years in New York. I think so has the medical costs. Just because gas prices are low dose not mean inflation is low

samsonradu 9y ago
Housing is not included in the CPI I believe. https://economics.stackexchange.com/questions/4777/why-arent-house-prices-included-in-cpi https://economics.stackexchange.com/questions/4777/why-arent...
- txsh 9y ago
  You’re right. Housing isn’t a consumer good. But CPI does fail to measure inflation in consumer goods. I agree with op that there has been inflation for years.
- elvirs 9y ago
  CPI does not include rent but thats what more than half of average couples combined income is spent on. (Couple with full time $15 per hour jobs living in $2000 per month apartment)
  - BenoitEssiambre 9y ago
    It includes rent just not house prices because house prices reflect investment (cost of consumption in the future) more than immediate consumption. House prices are converted to a kind of rent equivalent before being included in CPI.
  - dragonwriter 9y ago
    > CPI does not include rent CPI includes both rent costs for actual rentals and imputed rent for owner occupied housing. [0] > but thats what more than half of average couples combined income is spent on. More like a quarter. [1] [0] https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.pdf https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an... [1] https://www.bls.gov/news.release/cesan.nr0.htm https://www.bls.gov/news.release/cesan.nr0.htm

MrEldritch 9y ago

"And if threats of a trade war with China or other countries turn into reality, this will tend to increase inflation, driving up prices both directly through new tariffs on imported goods and indirectly by encouraging less efficient production." ...I'm confused as to why either of those effects are supposed to be good things.

craftyguy 9y ago
Those aren't the 'good things' that trade wars are supposed to bring. Some people believe trade wars bolster local economies, by giving local manufacturers a price advantage for their goods.. thereby increasing demand for local products and "increasing jobs". I don't think it has ever worked out that way, despite all the rhetoric.
- simonh 9y ago
  Quite. Since those locally produced goods are more expensive (otherwise they’d have been locally produced already), everybody buying them now has less money to spend on anything else, reducing consumption and hitting the rest of the economy. Then you’re trapped, because if you try to unwind the damage, those jobs you did create go away again.

tanderson92 9y ago

> The shift looks to be driven mostly by a rise in investors’ expectations for future inflation. In the United States, prices of inflation-protected bonds imply that investors currently expect consumer prices to rise 2.09 percent annually over the next five years, up from 1.65 percent expected in September. This claim that the shift is due to inflation expectations is inconsistent with the data. Most of the rate increases has been due to real interest rate increases, unless I am missing something which I don't think I am. source: https://fred.stlouisfed.org/series/T5YIE https://fred.stlouisfed.org/series/T5YIE, https://fred.stlouisfed.org/series/DGS5 https://fred.stlouisfed.org/series/DGS5

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pishpash 9y ago
It has been both, about half and half.
- tanderson92 9y ago
  Right, so I don't understand the confidence with which the reporter is mentioning only one and implicitly attributing the rise exclusively to it. Even if you use 50% of the effect as being due to one or the other as the threshold, it's actually been more due to real interest rate increases (only 55-60% so you're right it's like half and half), so the piece is just really baffling.

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rmrm 9y ago

In a world where inflation is going to go up, what should one invest in? People will often say gold. Which I guess is a proxy for any fixed supply asset. But weve seen price inflation in many things other than gold, such as houses and land, art, stock prices. Most things of lasting value ie not consumables. Does a precious metal have some other special qualities that make it behave poorly relative to other limited valuable assests, and then well? What say you HN? Whats the play to protect ones assets? Or does one just need to avoid cash and bonds?

toss1 9y ago
From what I've read, gold and other PM generally perform inversely to real interest rates (vs nominal FED rates). This somewhat makes sense, as gold has a carrying cost (storage, security, etc.) and earns no interest, whereas when real interest rates are high, the money will produce better yield in bonds and similar investments. In a situation of runaway inflation, nominal interest rates are insane also (I've seen double-digit percentages per month in one hyperinflation event in a country I visited), but the real inflation is likely even faster, making real interest negative.
downrightmike 9y ago
Investing in the total market: vtsax because yes it will crash, but it will also recover.
dredmorbius 9y ago
A diversified portfolio.
qazwsxedchac 9y ago
Precious metal, if held in physical form, has the unique property of being no-one's obligation. Additionally, it is by definition a bearer "instrument" and easily transportable, therefore suitable for mitigating political risk. This is why it performs well in times of crisis. There is no one-size-fits-all answer to your second and further questions. Too much depends on individual circumstances, risk appetite and time horizon.
- 9y ago

lewis500 9y ago

"if threats of a trade war with China or other countries turn into reality, this will tend to increase inflation, driving up prices both directly through new tariffs on imported goods and indirectly by encouraging less efficient production." I wouldn't call this "inflation" in the sense economists mean it. This could cause a one-time rise in prices, but it would not necessarily mean permanent change in the rate prices go up each year. Maybe some of yall would like this federal reserve simulator I made last year: http://lewis500.github.io/macro/ http://lewis500.github.io/macro/ It is one of my least popular explorable explanation but also one of my favorites.

davewritescode 9y ago

Housing market should cool off bit. When people buy houses, they look almost exclusively at the monthly payment which includes interest, taxes and insurance. The FED will raise rates slowly to avoid crashing the economy

SCAQTony 9y ago

Hopefully wages rise with the Consumer Price Index (CPI). Arguably for the back-half of income earners this has not happened for decades. If we experience the same consumer price increases as was experienced through 1980-1990, rents and goods will go up an average of 5.4% each year over a 10-year period. If it gets as bad as the 1970-1980 CPI then rents, goods and services will rise almost 7.1% a year and will practically double after a 10-year period. Here are the historical CPI numbers from 1913 to 2017 —(1970 to 1980 was not pretty.) https://www.minneapolisfed.org/community/financial-and-economic-education/cpi-calculator-information/consumer-price-index-and-inflation-rates-1913 https://www.minneapolisfed.org/community/financial-and-econo...

lawtguy 9y ago
In the US, the combination of globalization, automation and lack of support for private sector unions means workers outside of the creative class have very little bargaining power. I'm sure workers will get raises, but I don't see much hope for them getting much above the inflation rate. The only political solution that seems to be getting any traction at all is raising the minimum wage. Some states are doing that, but I don't see the Federal minimum wage getting raised any time soon.
- RickJWagner 9y ago
  Agreed.
- simonh 9y ago
  That just puts the crush on the sectors that Offer low wage jobs, increasing their costs and the prices they must charge their customers. The people who do get those jobs earn more, but there will be fewer of them, making the poverty trap even deeper. I’m beginning to think a low Basic Income might help, maybe as little as a hundred bucks a month. The problem with current BI tests is they are Big Bang experiments - big basic incomes for a tiny number of people. However a relatively low BI combined with moderate minimum wages could effectively act as a subsidy on low paying jobs. It would have to be funded by a tax increase, but a relatively modest one. This should make more low paying jobs viable to offer, make them more economically attractive to workers in terms of total earnings, and make the businesses that employ people on low wages more price competitive, increasing low wage employment. All without the massive distortions to the economy a high BI could cause. This approach to BI wouldn’t free everybody up to become artists and explorers, but that was always a fantasy anyway. Somebody has to do the productive work somewhere, the trick is to make that work progressively more secure and rewarding.

tunesmith 9y ago

Still having trouble figuring out of being a landlord of a second home is good or bad in this environment. You owe a fixed-rate mortgage, and you're charging rent.

msegal 9y ago
Rents will increase, your mortgage will not if you're locked in. The resale value of your house will be pushed down by reduced affordability, but pushed up by higher rents and cost of goods. Ultimately owning a hard asset in an inflationary period is a good idea.
- debacle 9y ago
  The value of most residential property is tied to demand, and demand is tied to interest rates and ability to borrow. If most people can't borrow 300k+, most houses are going to see a drop in value.
harry8 9y ago
If the real value of the residential property in future sale price and rent received goes absolutely nowhere. Having it mortgaged will cause you to win big. Stupid example, say inflation goes to 7% year on year. Your house is say $100,000 totally financed by debt. You pay interest only on your loan. 10 years time, your loan is $100,000 and is worth $50,000 in 2018 dollars due to the inflation. If you have a 0% real return on the value of your house you can sell it for $200,000 in 2028. A nominal return of 100% over 10 years even with zero increase in real value of the house. So if you have a good investment property it will go really well. But if you have something that becomes a future slum, you can still lose.
- djrogers 9y ago
  That completely ignores the downward pressure on home prices that a high interest rate has. Inflation at 7% would be tied to significantly higher interest rates, which would reduce the buying power of potential buyers, which reduces home prices. Leaving aside all the mechanics of timing the market such that you have a huge, low interest, fixed rate mortgage in hand when inflation magically jumps to 7%.

RickJWagner 9y ago

Ugh. Higher interest rates and inflation will work against those on the lower end of the poverty scale. (Yes, wages will go up. But not enough to match increases in the price of goods.) Those who need to borrow will fall even farther behind. Low inflation and rates isn't ideal, but it's probably the best scenario when there is a big difference between high and low economic ends.

neilwilson 9y ago

They've been saying that about Japan for decades. Still waiting.

graeme 9y ago
I think some people have predicted that Japan's rates might rise in the long run. Has anyone serious made predictions of a near end to Japan's current period?

s2g 9y ago

So will this cool the market and cause housing prices to become less incredibly insane, or will it just make things more expensive. I'm gonna guess the latter because god forbid something good happens to my generation.

jacksmith21006 9y ago

Not convinced. Was talking to my 20 year old kid and was thinking he has never seen anything but crazy low interest rates for his entire life. But I just do NOT believe things are going to change. Guess we will see.