The housing market has entered a new age of precarity as the Bank of England increases its rate to 5 per cent even though it will create a mortgage rates time bomb that will have a devastating impact on millions of people.
The average rate for a two-year fixed-rate mortgage is already 6 per cent and could go higher. This figure, as was widely warned when former prime minister Liz Truss nearly crashed Britain’s economy last autumn, is a tipping point for the housing market.
House prices hit historic highs during the pandemic, and, in recent years, homeowners have borrowed more in relation to their incomes to pay them – taking out bigger and longer mortgages than ever before. This means that 6 per cent will cause the equivalent amount of financial stress as double-digit rates in the 1980s.
You can’t really compare this mortgage crunch to those that happened when rates soared in the 80s or 90s, though. It is worse. Homeowners have bigger debts and relatively lower wages now.
Forget about former prime minister Boris Johnson’s misleading of Parliament, it is this which will tear the Conservative Party apart in months to come and, more importantly, cause serious financial pain for millions of homeowners and private renters.
Though they are responsible for causing the pain, it’s not the Bank of England’s job to worry about this.
The central bank only cares about one thing: bringing inflation down to their 2 per cent target. If people with mortgages – including landlords who can pass their rising costs on to renters – start to struggle, they see that as a political problem for the government to clean up.
Due to the cheap credit and historic house price inflation seen since the 2008 global financial crisis, Britain’s housing market is in unchartered territory now that inflation remains at 8.7 per cent – the worst headline inflation rate in the G7.
There are reasons for this – the fact that much of our housing stock is poorly insulated, that Brexit has added to delivery times and costs for UK imports, shortages of certain food items such as tomatoes and cucumbers due to cold weather in Spain and Morocco and worker shortages in some places leading to higher wages for those who are available, which feeds back into inflation.
Nonetheless, Chancellor, Jeremy Hunt, thinks the Bank of England is right to increase rates. He wants to stay “on course”, has put pressure on banks to help their customers, and has ruled out new government support for anyone struggling to pay their mortgage in this new economic climate (for now, anyway).
Labour don’t have more of a plan. Their solution? Telling banks not to repossess people’s homes and give them time to make repayments.
Both parties are echoing the words of former prime minister John Major, who held office during a period of high inflation and interest rates: “If it’s not hurting, it’s not working”.
But, to be blunt: this is now a mortgage rates crisis like no other. We have never had such high house prices at a time of high inflation and rising interest rates.
What happens next is uncertain.
The mortgages industry is worried, and rightly so. As a broker, who wished not to be named, told me yesterday: “It feels like we’re slowly driving over a cliff and the folks at the wheel are looking the other way. I’m worried about my clients, and I feel guilty for believing that inflation was transitory.”
Poverty experts are worried, too. Rachelle Earwaker is a senior economist at the Joseph Rowntree Foundation (JRF). “This is going to have significant consequences for low-income mortgage holders who come off of fixed rates.”
According to the JRF, there are 1.7 million low-income households with a mortgage in Britain – and over 700,000 households are struggling with their repayments already.
Housing market analysts say that the best we can hope for is that this is temporary because, if it isn’t, as Neal Hudson puts it, “there is going to be a lot of pain for households and the wider UK economy”.
Britain’s high house prices relied on cheap credit. Without it, they will fall (by as much as 25 per cent according to predictions from the likes of Capital Economics); mortgage holders who were able to buy because of low rates will struggle when their fixed-term deals end; and the received wisdom that buying a home is a safe investment which will make you money will be well and truly exploded.
Roger Bootle is one of Britain’s best-known economists. He is the chairman of Capital Economics and was a leading voice in warning that house prices were too high before the 2008 global financial crisis. “It’s not going to be pretty,” he told i last week.
“If the Bank of England get it wrong, they could go too far and push the economy over the edge, but if they get it wrong, they could undercook.”
This is the end of homeownership as we’ve known it since 2008 – the era of low rates, high house prices, and affordable monthly repayments is nearly history.
Britain’s housing market is no longer a place where owning a home is cheaper or more secure than renting. Just as renters are at the mercy of their landlords, homeowners are now at the mercy of their lenders.
