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LONDON — Even in the midst of a full-scale financial crisis, much of British politics is about home ownership, ultimately.
Following an extraordinary fall in the pound sterling and panic in government securities markets following Prime Minister Liz Truss’ ‘mini-budget’ tax cuts, the Bank of England on Wednesday announced emergency measures to support struggling pension funds and stabilize the UK economy.
But as markets look to currency and bond prices and ponder the implications for the complex global financial ecosystem, for many of the heavily indebted Britons it’s a different set of numbers that matter most – those related to real estate prices and mortgage interest. rates.
“I can’t think of anything worse for Tory economic competence than being responsible for driving everyone’s mortgage bills up chaotic through reckless rhetoric,” said Giles Wilkes, a former government adviser who is now a senior researcher at the Institute. for government and partner at Flint Global.
Britain is a nation where land has always mattered. For centuries only the landowning classes were allowed to vote, and even in recent decades lawmakers have been careful to heed the old adage that an Englishman’s home is his castle. In the 1950s, Housing Minister Harold Macmillan was catapulted through the ranks of Cabinet and into Downing Street thanks to a successful housing construction programme. In the 1980s, Margaret Thatcher reaped the election rewards by allowing millions of social housing tenants to buy the homes they lived in.
But prices have soared over the past 20 years, and Britons are now saddled with huge mortgage debt. According to market data firm Statista, the UK topped a European list of outstanding residential mortgages at the end of 2021. And this new generation of homeowners has never known anything but interest rates the lows that normalized after the financial crash of 2008. . For millions of households, the prospect of a sudden rise is daunting.
“[People] desperately care about their homes,” Wilkes said. “The mortgage foreclosure crisis of the early 1990s stained conservatives for years because it was just brutal, people just weren’t able to pay for the house they actually live in.
With the Bank of England now all but certain to raise rates dramatically in a bid to tackle runaway inflation, Britons are anxiously checking mortgage deals and calculating their household exposure. Grim warnings abound of a collapse in house prices; repossession of a home; deep cuts in household spending triggered by spiraling mortgage bills.
The mortgage market saw hundreds of products pulled overnight on Tuesday pending a rate hike, dramatically narrowing rate choice for those who buy or pay off, according to financial news service Moneyfacts.
The political implications of a mortgage crisis could be devastating for the ruling Conservative Party.
“It’s absolutely toxic, not least because it’s very ‘basic conservative,'” Wilkes said. “They aspire, and their goal in life is to buy one of these new homes and get a job and pay their way.”
“Many people will face financial ruin,” added a former Tory MP, who was working in Westminster at the time of the pound sterling’s “Black Wednesday” crisis of September 1992.
“If you’re someone with a mortgage who voted Conservative in 2019, maybe the first time you did – well, you’re not going to vote Conservative anymore.”
MPs are already reporting a steady stream of emails from concerned voters. That in turn is causing genuine concern in parts of the parliamentary party, with a former Cabinet minister saying mortgage rates were a ‘big, big concern’ this week on Tory MPs’ messaging groups.
Their fears may well be well-founded given the sheer number of people who could be affected by a sudden and large rate hike.
Of the estimated 24 million households in England, 15.5 million (65 per cent) were owner occupiers in 2020-21, according to the government’s English housing survey. Of these, 35% of households were outright homeowners, while 30% bought with a mortgage.
UK Finance, the banking and finance trade body, thinks around 600,000 fixed rate deals were due to expire in the second half of this year, while 1.8 million are due to expire in 2023. Last year, almost half (45%) of those who opted for a fixed rate agreement signed only for two years.
Money market forecasts that the Bank of England’s base rate could nearly triple to 6% next year would therefore leave millions severely exposed.
Neal Hudson, housing market analyst and visiting fellow at Henley Business School, warned that such an increase could see mortgage payment affordability reach “stress levels” similar to those seen before the last two market downturns. housing, at the end of the 1980s and at the end of the 2000s.
“There is a real risk of housing market activity collapsing, and potentially also prices falling, and neither of these is particularly good for the housing market in general, or for the economy in general. general,” Hudson said. Capital Economics and Credit Suisse both estimate that house prices could fall by 10-15% in 2023.
“Much of our wealth is linked to the housing market”, Hudson added. “And there are definite links between the housing market and consumer spending, and generally feelings of wealth.”
And as tends to be the case in this type of crisis, not everyone will feel the pain in the same way.
Ben Zaranko of the Institute for Fiscal Studies think tank said the government was essentially redistributing away from those who benefited from low interest rates towards high earners who will disproportionately benefit from the tax cuts introduced by the Chancellor of Truss, Kwasi Kwarteng.
There would be a ‘shock’ ahead for ‘people who don’t earn huge amounts but have been able to borrow at a lower rate, which supports a better lifestyle – things like having a nice car and going on vacation’ , he predicted.
Robert Colvile, director of the centre-right think tank Center for Policy Studies, said the situation would be very different for the significant number of people – largely older – who now own their homes.
“If interest rates go up and house prices go down, the people who are most likely to suffer are the younger people, the people who are still paying mortgages, who are going to have to refinance, who are refinancing on an asset that is worth less “, he says. “You even have the specter of negative equity.”
Renters might not come out unscathed either, points out Les Mayhew, professor of statistics at Bayes Business School.
Buy-to-let landlords are also expected to be hit by rising mortgage rates, he said, and could raise their rents significantly in order to stay afloat.
Long time ahead
While the violent shock is worrying, many believe it has been a long time coming.
House prices have “defied gravity” due to longer mortgage terms and years of low borrowing rates, warned Mayhew, who is also head of global research at the International Center for Longevity. On the supply side, a lack of housing construction and an aging population unwilling to downsize have pushed up prices further.
“In the short term, I would say that we have been waiting for a crash for a long time. We have now reached this point where interest rates have increased and you cannot have mortgage contracts of infinite duration. There are not many levers or mechanisms left to pull,” he warned.
“There will be an adjustment, whether it’s a big one or a small one, it’s very hard to say,” he said.
Colvile agrees there’s a big difference between home prices just coming off the boil and forecasts of falling prices.
A 10% fall would only bring people back to prices in August 2021, he points out, and the constituency for rising UK house prices is “pitifully small”, opinion polls suggesting that most people want prices to go down.
Only one in five who responded to a YouGov tracking poll said they would be better off if house prices rose, with a similar number saying they would be better off if they fell. Almost half of respondents said it would make little difference to them.
But most agree that there are much better ways to provide affordable housing.
“Obviously it’s a much better thing if house prices go down because we’ve suddenly built more houses, than because there’s a sudden economic calamity,” Colvile said.
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