When you read the newspapers today you would think that we are seeing record high interest rates. For most house buyers the increase has been around two percentage points. Now these people are paying around 2% for the next 12 months, when they have been paying less than 1% for the last few years.
But the media keep on writing stories about the dangers of borrowing money with this “sudden and steep increase in interest rates”. In one sense the increase has been big from just below zero to between 2% and 3% – an increase of 400%!
But this is a meaningless description of reality – zero and below zero interest rates are just central bank folly -rates of between 1% and 3% are extremely low by modern standards. Just look at this graph:
The second important point is that there is a significant difference between the 3-month, 6-month and 12-month interest rates. In this market it is sensible to ask for your loan to be based on the 3-month or 6-month rate, like most companies do. The 12 month rate is generally higher that the shorter rates for technical reasons. When you deal with your bank ask for loan linked to the 3 month or 6 month rate. If they are only selling 12 month rates then go elsewhere. If the other banks are playing the same game call the Consumer Ombudsman and complain about cartel behaviour. It is not unusual for banks to restrict competition to suit their profits.
In most cases, there is no reason to think that 3% is any way causing significant hardship for borrowers, especially when inflation is running high. In fact, if people and companies could have borrowed at these rates over the last 30 to 40 years then the economies would be booming because this is cheap money! Naturally some poor folk have borrowed large loans that they are now unable to repay, but nobody was forced to borrow, and more importantly the banks and other lenders were not forced to lend to these people.
Borrowing costs during these times have been much higher and yet countries, companies and home owners have been comfortable with this cost of money.
Many of the journalists who write these stories are probably underpaid with little or no experience from working in banks. The media is also famous for ignoring the history of the markets – they want to sell stories with shocking headlines. Furthermore, they tend to rely heavily on banks to tell them what is happening and that source of information is targeted at selling more financial products where they can earn more money based on client ignorance.
One great example of this is the Taxpayers’ Association’s monthly magazine, Taloustaito, where most of the articles on finance are based on interviews with the “experts” working at banks. It have been like this for decades and yet nobody raises any criticism of this fact that there is a clear case of conflict of interest. The other main newspapers, Kauppalehti and Helsingin Sanomat are little better. To prove the point it is interesting to note that the Editor-in-Chief of Kauppalehti has just been appointed to be the CEO of the banking and insurance lobby! That tells you everything you need to know about the relationships here between the media and the financial sector.
So just ignore the rantings of the media that tries to frighten readers to read more so they have more reason to stare at these stories of doom and gloom – and that sells advertising!
Take these stories with a pinch of salt about how interest rates will kill the housing market. If prices fall then there is a great opportunity to buy. In fact most places here in Finland are cheap compared to other places in Europe.
Certainly they are a good safe buy when you compare building standards here compared to many places in Europe where energy efficiency and good insulation are still ignored by construction companies. Your correspondent has lived in 6 different countries and travelled extensively for project work to dozens of other countries. Finland’s existing housing sector is well-built, well-insulated, and often heated with cost effective district heating, ground heat or with air heat exchanges.
The Russian war is causing a fall in economic activity in Europe for the next few years and that means that interest rates will not go much higher and may fall. Inflation is embedded in our economies and will be reversed by an end to the war, but do not hold your breath for the next few months. Putin, the war criminal, will end up in prison in some god-forsaken country that offers him refuge from angry Russians who have lost so many of their sons and fathers because of his madness.
Photo from ECB website…