When Vince Cable issues a warning we should all pay heed.
According to the Guardian he was speaking last week at the Resolution Foundation and claimed that booming house prices are destabilising the economy. He said we should all be worried about what will happen when interest rates return to normal.
He was speaking in response to a report of research by the Resolution Foundation which found:
One in ten of today’s mortgagors risk being imprisoned by borrowing deals which are likely to make their repayments unaffordable as interest rates rise over the next four years. Around 770,000 households are both at risk of being ‘mortgage prisoners’ due to a limited ability to switch to better mortgage deals and therefore insulate themselves against future rate rises, and at risk of being ‘highly geared’ where monthly mortgage repayments are eating up at least one third of their disposable income by 2018.
Vince also repeated his warnings specifically about the Help to Buy scheme, which we highlighted last summer. At that time he feared it would inflate the market and cause another housing bubble.
He was also concerned about proportion of debt that people have compared with their income. He added:
I am very concerned by the buildup of household debt in relation to income. That was one of the underlying factors in the buildup to the financial crash. It meant mortgage debt was 85% of household debt. People have stopped talking about that. In the last few years the ratio in the UK has fallen back substantially. A lot of people have paid off their debt but the projection is that it is going to start rising rapidly and surpass the previous levels. This is almost entirely a housing story. I have expressed my views forcibly over the last nine months. I do worry about a new surge in house prices with all the practical consequences of that. It is a particular London phenomenon.
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15 Comments
Here is a thought, 1985 took out a new mortgage, the interest rate 13%, then went up immediately to 13.5%. We managed. We had to.
theakes
Very glad you could “manage it”. The fear is that so many people (especially in London/South East, of course) are so truly desperate to “get on the housing ladder” (not least to escape the obscene level rents are running at) that they are mortgaging themselves up to the hilt/far beyond the 1/3 of disposable income my generation was always told had to be the maximum we could afford and are already just about at the limit of what they can bear financially. The smallest rate rise could well send them under (and, for many, there are no more savings to be made; Sainsbury’s has been abandoned in favour of Lidl, holidays have gone, clothes are being worn for much longer etc. etc.) British short-termism (open up the mortgage gates and focus on home ownership) is triumphing once again whereas (as Cable had also consistently pointed out) what we/the UK should really be doing is re-gearing the economy away from the dreadful over-reliance on service provision (particularly financial) and refocusing instead (a la Digby Jones) on manufacturing and exports and that means, above all, developing the SME sector in terms of skills provision, taxation, consultancy and advice.
He’s got you fellas trained well, then. His prediction of the Royal Mail price was pretty good too, was it?
We need to start thinking about the “new normal” for interest rates. A rise of up to 4% (still historically low) would have such a huge effect on people’s spending that I honestly can’t see that sort of thing happening in the foreseeable future, never mind a rise of back up to 7% or 8%. Our economy is still so hugely based on consumer spending that it can’t afford for people to feel poorer.
Vince is good at identifying the problems, but his solutions leave a bit to be desired. I got excited a few months ago as I read an interview with him in the Independent about Britain’s soaring house price bubble, but unfortunately his solution was the same one trick pony of “concrete over the green belt”. Carney and the whole government have got their economic policies wrong. We need a balanced solution that includes increasing interest rates, rather than picking a big fight with the countryside. Fiscal gimmicks should never have made it into either of this government’s budgets because any penny is going to be needed.
People say “it’s only a London bubble so we can’t tighten monetary policy”, but this is only half true, because present monetary policy is mainly benefitted London anyway by propping up the banking led economy.
In my opinion the economy has already crashed – house and annuity prices have rocketed, ONS just doesn’t include this data in their inflation figures.
By the way, it’s not only the UK that has got it wrong, the IMF have abandoned any pretence of being unbiased by calling for more money printing for the banks. US has got it wrong, EU has got it wrong, Japan has got it wrong, another global crisis could be on the horizon.
In the old days, the government would put up interest rates to head off the problems flagged up. In my opinion, the MPC should have taken this course of action nearly a year ago.
Eddie,
unfortunately your Cassandra like predictions could well be right. Let’s hope that we don’t sell the farm in trying to bail out the too big to fail banks again at the expense of every other stakeholder in the economy . There is no ammo left in the monetary policy armoury. Debt write-downs will be the only answer when the next housing crash hits. Atif Mian and Amir Sufi in their new book ‘House of Debt’ write:
“When a financial crisis erupts, lawmakers and regulators must address problems in the banking system. They must work to prevent runs and preserve liquidity. But policy makers have gone much further, behaving as if the preservation of bank creditor and shareholder value is the only policy goal. The bank lending view has become so powerful that efforts to help home owners are immediately seen in an unfavorable light. This is unacceptable. The dramatic loss in wealth of indebted home owners is the key driver of severe recessions. Saving the banks won’t save the economy. Instead, bolstering the economy by attacking the levered-losses problem directly would save the banks.”
Also in the old days inflation was much higher. So if you took on a debt you couldn’t comfortably afford, you didn’t have to wait long before inflation had made it much more manageable. For example, if inflation is 10%, after three years you have already lost a quarter of that debt. This is just what happened in the 1970s and 1980s, prices went up, but so did wages, so your effective debt went down. This led to the cultural acceptance of very high mortgage payments, as people knew it just meant waiting a few years for inflation to turn the mortgage you couldn’t really afford into one you could.
The early 1970s saw a house price boom, then there was a house price crash in the mid-1970s. However, the crash worked by house prices standing still while the price of everything else shot up. So negative equity wasn’t a problem, and people didn’t really feel the crash.
@Joe Bourke – crony capitalism+end of moral hazard=here, now.
Thanks Joe, yes Cassandra does sound like an apt description, but on this issue I think I’m right even if I’m wrong, because savers and pensioners shouldn’t constantly be expected to subsidise borrowers.
Why should I listen when he and his 56 mates haven’t listened one iota to the membership. They have ignorred our values and liberal beliefs throwing away any of our conference decisions at best disposing of them into the long grass rather then stand up for the party and its membership.
Maybe it’s the membership that are confused?
LibDem doesn’t mean that Liberal can ignore Democratic. Democratic means you should go into coalition if that’s indicated by the voting results, but you can’t get everything you want in coalition, and indeed shouldn’t!
Eddie, on this one I agree with you. One of the key problems is that far too many, especially in the policy making and Banking sectors, only see this as a ‘London’ issue, which can, therefore, be contained.
However, the reality is that a housing crisis in London is a housing crisis for all of the UK for a host of reasons.
Still, (this is not in response to Eddie) one thing I would caution against is reverting another ‘business as unusual’ approach to escape this problem, such as ‘we need more manufacturing’. We need to be more adaptable and diverse than that. Yes, there is a deficit in the UK’s imports and exports which needs tackling and yes we certainly need to do more to support medium businesses (small business need support, as well, but they actually get quite a bit of support already (which is good) and cannot sustain a whole economy, so it the medium businesses we now need to foster; we need to get them into the international market).
No one industry, whether it be financial or manufacturing or any other industry, can support a whole economy on its own, we need to be more broad-thinking in our approach now.
Thanks Liberal Al. I agree with what you are saying.