What if interest rates trebled?

[Zhirkov]

Interest rates are at historically low rates.
Say, the currently stagnant big economys of the eurozone begin to experience strong growth. The ECB in order to be prudent raises interest rates to prevent inflation taking off.
What happens to us in such a situation?
People have borrowed to the hilt to purchase a house, or 2.
Suddenly they can't afford to make the repayments.
It we had our own currency, large wage rises to meet higher mortgage repayments would be possible without totally ruining international competitiveness. It would tick off the multinationals a lot though as their repatriated profits would be reduced as our currency plummeted.
So large wage rises would be impossible while we're tied to the Euro.
So what would happen?

[nuj]

It we had our own currency, large wage rises to meet higher mortgage repayments would be possible without totally ruining international competitiveness.

We can add economics to spelling in the list of subjects you were never any good at.

[rockofcashel]

Thanks for saying that NUJ, so that I didn't have to explain it to poor Zhirkov.

I also believe that if interest rates trebled, SF would win lots of seats, because there would be a ************************ing lot of really, really pissed off voters, and any party that says they'll stick it to the banks, would get a lot of support.

However, given the very poor grasp of basic economic theory displayed in the first post, I'm not going to answer much more.

And also because Zhirkov, true to form, will not begin his habit of silly sarcastic posting, rather than flesh out his ideas into a coherent argument

[Fiacc]

Zhirkov wrote:

If we had our own currency, large wage rises to meet higher mortgage repayments would be possible without totally ruining international competitiveness.

No, if we had our own currency the Central Bank would increase interest rates to choke off rampant property inflation. Wages are determined by other factors, chiefly the need for firms in the internationally traded sector to ensure that labour costs do not significantly exceed those of their main competitors. The mortgage rate would have no bearing on their decisions and trade unions, outside the public sector, would be powerless to influence them

[rockofcashel]

Zhirkov wrote:

If we had our own currency, large wage rises to meet higher mortgage repayments would be possible without totally ruining international competitiveness.

No, if we had our own currency the Central Bank would increase interest rates to choke off rampant property inflation. Wages are determined by other factors, chiefly the need for firms in the internationally traded sector to ensure that labour costs do not significantly exceed those of their main competitors. The mortgage rate would have no bearing on their decisions and trade unions, outside the public sector, would be powerless to influence them

oh, your going to be sorry you said that

[Fiacc]

oh, your going to be sorry you said that

Canathaobh?

[SPN]

Outside of John Bull's two Islands, most Europeans fix the interest rate on their mortgage for the duration of their mortgage, some even take out two-generation mortgages.

The result is that decisions taken by the Central Bank will be based on the impact on rational people, not smart arses.

A trebling of interest rates is very possible in the next 5 years.

If it happens, Ireland Inc. is fc*ked.

[dl.]

Yes and you'd probably have to remortgage your house to pay for your mortgage.

[ibis]

People are apparently using the increased valuation of their houses as "seed capital" to finance mortgages abroad. In other words, buy a house for €400K, next year it's gone up to €440K, use the €40K difference to remortgage and borrow another €100K to buy a €140K flat in the Algarve. This is very high geared leverage - particularly since the mortgage repayments may be front-loaded with interest.

If interest rates rise to the point where a noticeable number of people cannot meet their repayments, then house price valuations may fall. If that happens, then the person in the example above loses their backing asset on the remortgage (say, the house valuation drops back to €390K). That can lead in turn to another "fire sale", and so on. There's enough of a feeling that house prices are too high for any upset in the market to turn to a buying freeze.

It may not happen, but if it does, and if the levels of leverage are high enough, the results would be unpleasant and quite rapid.

[commentator]

The continuance of the property boom - which is to say the Tiger boom since they are one and the same - is predicated on the total sum of personal indebtedness continuing to rise ar the current levels of about 1.1 billion euro a week or 55,000,000,000 a year. Any substantial rise in interest rates would have a catastrophic impact on this boom given that it would stall this wave of ever growing debt, but given the inertia in Europe and the fact that de Villepin and merkel are hemmed in in their attempts to boost growth I don't see the major economies growing sufficiently fast to trigger really substantial rises.

Curiously our boom is wholly reliant on the eurozone in general remaining stagnant. Recovery there would nail the irish economy. We are in fact a parasite economy reliant on the host's weakness and living at least in part off monies borrowed from European pension funds at low rates of interest.