ANDREW NEIL: How have Tories enraged Generation Rent AND Mortgage?06/16/2023
ANDREW NEIL: How on earth have the Tories managed to enrage both Generation Rent AND Generation Mortgage?
Nationwide, the country’s biggest building society, raised its mortgage rates this week for the third time in under a month. With the rise in interest rates still fast and furious, major lenders are having to pay more for the funds they raise.
So, with rapid fire, they’re passing on the cost to borrowers. HSBC, Britain’s biggest bank, was so bewildered by the dizzy rise in rates it simply took its mortgage products off the market until it got a better idea of where rates were going.
These are scary times for homeowners with a mortgage and those struggling to get on the housing ladder. Not all homeowners are affected equally. The eight million who’ve paid off their mortgages are insulated from the rises, at least when it comes to their homes. Of the seven million with a mortgage, many are on low fixed rates that won’t come up for renewal for a year or two.
But for those whose fixed term is coming to an end and those first-time buyers trying to scrape together the purchase price, the prospects are daunting. Almost 120,000 homeowners will come off cheap fixed rates this month alone.
Two years ago, they were able to borrow at 2.59 per cent over two years. They are being forced to renew at 5.83 per cent, which means twice as much a year in interest payments on a £200,000 25-year mortgage — and that’s before mortgage providers push through this week’s increases. Some families will now see mortgage payments devouring 50-60 per cent of their income.
Nationwide, the country’s biggest building society, raised its mortgage rates this week for the third time in under a month
HSBC, Britain’s biggest bank, was so bewildered by the dizzy rise in rates it simply took its mortgage products off the market until it got a better idea of where rates were going
The cause of this mortgage horror show is simple: inflation. Or more specifically, Britain’s stubbornly high inflation rate. Yes, inflation is starting to fall everywhere after the global post-pandemic spike, even in Britain. But it is falling more slowly here than in any other major economy.
In the U.S. it’s already down to 4 per cent and falling fast. In France it’s 5.1 per cent, in Germany 6.1 per cent. But in Britain it’s still 8.7 per cent, having only recently slipped below double digits. Even Italy is doing better at 7.6 per cent.
British inflation will fall further in the months ahead. But nobody can be sure by how much or how quickly. Private sector pay is up 7.6 per cent year on year and public sector pay rises are not far behind.
At the current inflation rate, these big pay rises still represent a real-terms cut in earnings. But they’re high enough to bake some inflation into the system and impede its fall, especially as productivity growth is negligible. So the Bank of England has to keep raising interest rates until inflationary pressures truly abate. It’s already raised the Bank base rate multiple times, from an abnormally low 0.1 per cent in December 2021 to a more regular 4.5 per cent now.
It is this increase that has percolated through to mortgage rates and caused homeowners and aspiring homeowners so much pain.
The Bank of England has to keep raising interest rates until inflationary pressures truly abate. It’s already raised the Bank base rate multiple times, from an abnormally low 0.1 per cent in December 2021 to a more regular 4.5 per cent now
READ MORE: Homeowners face yet more mortgage pain as markets predict interest rates could hit 6% by the end of the year
Markets predicted interest rates could hit 6 per cent by the end of the year [File image]
But because UK inflation is falling at a snail’s pace (so far), the Bank is expected to raise rates again next week, to 4.75 per cent: a harbinger of even more mortgage misery to come. Indeed, the financial markets now expect the Bank base rate to peak at between 5.75 per cent and 6 per cent, which would be excruciating for mortgage holders, many of whom could simply not afford the monthly interest payments of 6 per cent-plus.
Tens of thousands would lose their homes because they couldn’t keep up the payments. The buy-to-let market, on which so many renters now depend (and which is already in serious trouble), would collapse. So would house prices, tilting Britain into the recession it has so far avoided. The stakes could not be higher.
Our predicament is not helped by the fact that the Bank’s reputation for dealing with inflation is somewhat shot to shreds. Public confidence in it has collapsed, even in its own opinion poll surveys. Who can blame people for losing trust in what is meant to be one of the great institutions of the nation?
Not so long ago, as inflation started to grip, the Bank assured us it would be transient. In reality it’s turned out to be rather long lasting. In 2021 it confidently forecast inflation would be back to its target 2 per cent within two years. It’s currently more than four times that. Quite an overshoot, even for a central bank with a well-honed track record for wrongly forecasting inflation. Now it predicts 2 per cent inflation some time next year. Why should folks believe it?
The financial markets don’t. They’re demanding higher returns to finance the Government’s mounting debts. The UK is now having to pay 4.9 per cent annual interest on two-year debt, the highest of any major economy and pretty much back to where we were in the aftermath of last September’s shambles of a mini-Budget. But this time Rishi Sunak and Jeremy Hunt don’t have Liz Truss to blame.
The politics of all this are horrendous for the Government so close to an election. But it needs to hold its nerve. All sorts of siren voices are urging ministers to prop up the mortgage market with a multi-billion-pound intervention to bail out homeowners in trouble. But we are in danger of creating a political culture in which the solution to every adversity is for the Government to open its chequebook (which is really our chequebook).
The UK is now having to pay 4.9 per cent annual interest on two-year debt, the highest of any major economy and pretty much back to where we were in the aftermath of last September’s shambles of a mini-Budget. But this time Rishi Sunak and Jeremy Hunt don’t have Liz Truss to blame
That’s what happened during the Great Crash of 2008 and its aftermath. It happened again during the pandemic, above all with the furlough scheme costing hundreds of billions. Those rattling the begging bowl yet again might not have noticed, but previous multi-billion bailouts have already stretched the Government’s fiscal position to the limit, with more than £1trillion in national debt (100 per cent of our GDP) and continuing annual budget deficits still in the tens of billions.
Does it really make sense to sanction yet another spending splurge, especially at a time when even governments can no longer borrow cheaply?
Is government to become the automatic provider of safety nets whenever anything goes wrong, in any sphere?
I think not.
Mortgage subsidies would make the Government’s fiscal position worse, impairing the fight against inflation and prolonging the current pain for everybody. It would mean less-wealthy renters subsidising better-off homeowners. It would artificially boost house prices, which have already risen by enough to put home ownership out of the reach of many.
The Bank also needs to hold its nerve. I reluctantly accept that interest rates will have to rise a bit more, given how sticky inflation is proving but it should not indulge the markets by fulfilling their expectations of a 6 per cent base rate. That would be economic harm on a massive scale.
The Bank also needs to hold its nerve. Pictured – Andrew Bailey, Governor of the Bank of England
Reputable studies suggest the full impact of the previous rises in interest rates has yet to be felt, with perhaps as much as 60 per cent of the pain still to come down the pike. The Bank needs to be patient and let the unpleasant medicine it’s already administered take its toll before increasing the dose.
The Bank also needs to be patient in monitoring the course of inflation through the summer and into the autumn without pushing interest rates above 5 per cent. It might be pleasantly surprised. Energy prices continue to subside. The recent rise in sterling against the dollar and euro will help to curb UK inflation.
Global trends are becoming disinflationary, especially in China, where inflation is effectively zero and whose cheap exports are about to become even cheaper, helping to keep a lid on prices everywhere.
So there’s a chance the current mortgage pain will be short-lived, that inflation really will start to tumble for the rest of the year and into 2024.
Those with mortgages coming up for renewal might consider renewing for only short periods to take advantage of interest rates when they start to fall again (perhaps even next year).
But some pain for some mortgage holders cannot be avoided and the Tories will rightly pay a political price.
Some pain for some mortgage holders cannot be avoided and the Tories will rightly pay a political price
On housing policy, it’s par for the course. For the past 13 years a Tory Government has presided over a perfect storm of stupidity when it comes to housing, for which it may suffer the consequences.
It’s long been a feature of British voting habits that people are more likely to vote Tory if they own their own homes. That’s why Margaret Thatcher sold more than 1million council houses, thereby creating a new generation of blue-collar Tory voters. Since 2010, the generation of Tories that succeeded her have managed to rip that legacy apart.
For a start, for 13 years they’ve failed to build anything like enough new homes, even as the population was growing strongly, largely as a result of mass immigration. At the same time, they allowed the Bank of England to swamp the economy with money to counter first the Great Crash, then the pandemic.
The result of the combination of limited housing supply and massive amounts of dosh swirling around the system was entirely predictable: house prices soared — leaving many, especially the young, unable to buy a home.
Whereas house prices had been two to four times the median wage, they soared to nine times. No surprise, home ownership declined as a share of the housing stock and, with social housing in short supply, a rising generation was forced to fall back on the private rented market.
The Tories are faced with a grim prospect: Generation Rent will not vote Tory. It is a screw-up entirely of their own making that cannot be undone this side of the general election
READ MORE: Brits face fresh mortgage bloodbath: Warning homeowners AND renters will be hit as Bank of England ‘will have to hike interest rates to 6 PER CENT’ – with Santander pulling new deals and lenders scrambling to push up charges
Yields on short-dated government bonds – known as gilts and used by lenders to set consumer borrowing rates – spiked above the level during Liz Truss’s brief period in No10 this morning
By 2020, after a decade of Tory rule, home ownership had collapsed for adults of prime working age. Those in their mid-30s and mid-40s are now three times more likely to rent than 20 years ago. A third of 35- to 45-year-olds in England were renting privately compared with one in 10 around 20 years before. Home ownership is now increasingly concentrated among the over-65s, who enjoy 75 per cent home ownership (and overwhelmingly vote Tory).
It’s almost as if the Tories specifically devised a housing policy designed to kill off their long-term electoral prospects. For let me reveal another clear voting pattern in Britain: if you rent, socially or privately, you are much more likely to vote Labour.
People who rented when younger but then became homeowners often changed their voting habits with the change in housing tenure. People who are still renting in their 40s are more likely still to be voting Labour — and more inclined to do so for the rest of their lives.
The Tories then compounded their predicament with an approach to the private rented sector of unfathomable idiocy. Having failed to build enough homes for folks to buy, thereby forcing them into private rented accommodation, they then turned on buy-to-let landlords with all the ferocity of born-again socialists.
This had the effect of reducing the supply of rented accommodation as landlords cashed out and so, naturally, forced up rents (up 16 per cent in London alone this past year). Clearly, not building enough homes to buy and forcing young people into rented accommodation indefinitely was not enough of a screw-up. They then had to undermine the private rented sector, too.
The Tories are faced with a grim prospect: Generation Rent will not vote Tory. It is a screw-up entirely of their own making that cannot be undone this side of the general election. And now they will have to deal with distraught mortgage holders — Generation Mortgage — struggling to make their monthly payments when food and energy prices are already at record levels.
Mortgages would have risen whoever was in power. That is clear from what is happening all over the rich world. But somehow the Tories have managed to convince people that their incompetence has made things worse. In the weeks ahead, if they are to have any chance of rescuing a dire situation, they need to focus on what really matters to voters.
And that is not Boris Johnson, Partygate or peerages. Housing in general and mortgages in particular would be good places to start.
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