Interest Costs

We were reminded recently of a couple of facts. The first is that unless you were born before roughly 1967, you have not really experienced borrowing money other than under gently reducing interest rates. Fair enough, there were the odd blips on the way but the rates troughed between 2017-2020 depending on what index or facts you consider. Then they bumbled along the bottom, an extended period compounded by the economic consequences of the Pandemic.

What this also means is that all those people borrowing money to buy things like homes have only really experienced very low mortgage rates despite the trend having begun to turn in 2017 and perhaps now inexorably upwards, especially in view of unprecedented amounts of government borrowing exploding the money supply (which in the end we shall all have to fund). What will this mean to those who have bought homes over the last several years, only worried about ‘how much does it cost every month’? If they can only afford the monthly payment when the mortgage rate is 2%, what will happen if the renewal of their initial incentive term is at 3% or 4%? Can they afford double and even then, 4%pa is still below the long-term average rate for borrowing money in the UK to buy your home. What will this do to house prices too as it’s not just homes – it is investment properties, holiday homes, second homes… the average home is £262,000 according to the Halifax… is that nine times the average income? The long-term norm is a mere three times or so…

I was also reminded that on 9 November 2020, ‘Value’ stocks (of which we were and are full for clients), enjoyed their best ever day’s performance against ‘Growth’ stocks since records began. Indeed, more importantly that trend continued and ‘Value’ has out-performed ‘Growth’ by 25% since then and as we follow our convictions, our clients have enjoyed all the benefit of that. The chart still shows considerable additional catch-up to meet longer-term equilibrium levels. What’s important though is ‘did you listen to us?’ We’ve mentioned it many times and the eshot just before 9 November noted the most extreme under-valuation of Value stocks against Growth ever. As ever, I keep saying it is what we do now for the future which counts and not the past. Listening to those with a little knowledge and experience is perhaps the best investment you can make ever! These traits help us hold certain things and avoid others – however uncomfortable often too.