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Soaring interest rates will quickly end the era of cheap money and turn our world upside down. Just nine months ago, the bank rate stood at 0.1%. Soon it could reach 6%. It’s going to be an almighty shock. Here are five things that will change.
House prices will collapse. The UK property market has weathered a multitude of shocks in recent years, including the financial crisis, Brexit, Covid and the cost of living crisis.
Prices were supported by near-zero interest rates, but the era of the 0.99% mortgage already seems to be out of the history books.
Soon borrowers could be charged 8, 9 or 10% and millions of people will not be able to afford it. Many will be forced to sell in a falling market.
Years of easy money have left British property hugely overvalued. In 1997 the average home cost 3.55 times the average wage, today it is 9.1 times the wage.
Credit Suisse is currently forecasting a 10-15% crash. It’s not going to be pretty.
Retirement has become more risky. In 2015, then-Chancellor George Osborne removed the requirement to buy an annuity on retirement.
Today, most retirees leave their funds invested in the stock market to continue to grow, while withdrawing money as needed.
Home prices will finally crash, and this may just be the start
The drawdown is more flexible than locking into an annuity, but more risky. Although the annuity income is guaranteed for life, the drawdown is not.
This is concerning, as retirees are withdrawing ever larger sums to meet the rising cost of living, while their retirement savings are shrinking due to stock market volatility.
Ironically, after years of low returns, annuity rates are skyrocketing. It’s a complete turnaround.
Retirees may now find that a combination of withdrawals and annuities works best, providing protection in both scenarios.
Cash now beats stocks. For the past twelve years, the stock markets have been the only game in town.
Low interest rates and endless fiscal and monetary stimulus helped drive stock prices to record highs, with US growth stocks such as Amazon, Apple, Facebook, Netflix and Google-Alphabet making wealth for investors.
No one wanted to hold money and get nothing out of their money.
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Now that too has been turned upside down. The once mighty US stock market is down 25% so far, while savers can get 4.4% in cash.
Savings accounts could soon pay seven or eight percent if the BoE raises base rates as planned.
Investors shouldn’t abandon equities, but they can finally start embracing cash again.
Bonds are riskier than safe. Government bonds are meant to be low-risk investments, something investors include in their portfolios to offset volatility in stocks and shares.
Traditionally, financial advice has stated that if you hold 60% of your money in stocks and 40% in bonds, you should enjoy steady, consistent returns.
Not this year, when both dived at the same time. The bond market crashed 20%, which is just not supposed to happen.
Rising inflation is to blame. Bonds pay a fixed rate of income, which seems less attractive when prices rise and savers can get a better return on cash.
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Homeowners with variable rate mortgages will be on the front line
Bonds have been in a bull market for 35 years, as interest rates have fallen further and further. Now the bear market is here.
Gold is no longer a safe haven. Gold is supposed to act as a store of value in times of crisis and it should have shined in this troubled year, but it didn’t.
The price has plunged almost 15% in the past six months to $1,655 an ounce as it pays no interest and offers no inflation protection.
Instead, security researchers have piled into the US dollar, eager to take advantage of rising interest rates as the US Federal Reserve increases to curb inflation.
Another reason gold is in trouble is that it is valued in dollars, and the strength of the greenback makes it expensive for buyers of other currencies, especially China and India, where it comes from. most of the demand.
As long as US interest rates rise and the dollar remains strong, gold will struggle. This is another example of how our financial world has been turned upside down.