I am absolutely livid this morning. I watched in disbelief as Rishi Sunak, without so much as the tiniest bit of empathy, said we all have to “hold our nerve” as interest rates rise higher than they have been in decades.
That is not going to go down well with the millions of homeowners who face having to find an average of £2900 more a year if they are unfortunate enough to have to remortgage in he next year as their fixed terms come to an end. This is on top of the double whammy of high inflation and energy prices.
A Prime Minister who does not have to worry about money telling people that he’s going to make unpopular decisions for their own good is never going to go down well, but he could at least have tried to do something to show that he was on their side.
I don’t think I have ever heard anything so tin-eared from a Prime Minister since Thatcher refused to listen to reason over the poll tax back in the early 90s and that did not end well for her.
Let’s be clear, people are at risk of losing their homes if they can’t keep up their mortgage payments, whether they are forced to sell or whether their home is repossessed. I lived through that in the 90s where every day I saw people having their homes repossessed. And sometimes it was the tenants, finding out at the last minute that bailiffs were coming to evict them, who would turn up in shock, seeking support and a way out of this horrible situation.
And if people are going to lose their homes and need emergency housing, Councils are going to struggle to find somewhere for them to go, such is the extent of the housing crisis. I am not sure that the measures announced on Friday, to hold off proceedings until 12 months after the first missed payment, are going to help that much. If lenders agreed to it while they are raking in huge profits, it can’t be that great for their customers. It’s tinkering at the edges at most and racking up debt for people.
Fighting inflation is not an easy thing to do. Essentially the medicine involves slowing down the economy and stopping people spending as much money and interest rates are used to restrict people’s incomes and encourage saving. The trouble comes when people don’t have anything to save, businesses are already well overstretched after years of unprecedented pressure and costs continue to rise. This is a recipe for the sort of unemployment we saw in the 80s.
We may have high levels of employment at the moment, but we shouldn’t be complacent that that will last in this economic crisis that is largely of the Government’s own making.
Ed Davey said that Sunak was being patronising to the public and should be helping them instead:
Struggling homeowners will be rightly furious after watching an out of touch Prime Minister who has no idea of the pain caused by rising mortgage rates.
Rishi Sunak’s patronising advice to struggling families coping with the cost of living crisis shows why he is not up to the job.
People need help, not a Prime Minister instructing them to hold their nerve.
We have called for a £300 per month payment to those whose mortgage payments who have gone up by more than 10% of their income as Wendy Chamberlain explained the other day. I’d like to see more rebuttal to claims from Labour that that will be pretty expensive and won’t help that much. I can’t imagine that such a small amount would fuel inflation as much as they say. I wonder why we aren’t calling for a longer term ban on repossessions, though. This isn’t going to be over any time soon.
I’d also like to see us do more to help those who are renting. Housing insecurity is a horrible thing and if landlords are forced to sell up, it’s really going to push up private sector rents.
The answer, really, to the housing crisis is surely just to build more houses, especially for social rent. What better, more noble thing can a Government do than make sure its people have a secure, safe and warm home? You can do that in a sensible way that builds communities with services and doesn’t rip up the best of our countryside. I’ve always said that the Government that sorts housing out will be the Government that gives the best possible boost to the life chances of those on the lowest incomes. Surely it’s time to get on with it.
* Caron Lindsay is Editor of Liberal Democrat Voice and blogs at Caron's Musings
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24 Comments
Helping mortgage owners would be unfair, expensive and counterproductive. The problem was the 15 years of low interest rates.
Are we being timid?
I note the BoE Base Rate is the rate the BoE pay commercial banks for the monies they hold with the BoE; it is not a tax, nor is it mandated that banks have to directly pass it on to their customers.
Given the monies a commercial bank has to hold at the BoE only represent a fraction of the monies they hold and lend, there really isn’t a reason why the banks should pass the full rate rise onto their customers.
Hence the increases people are seeing are more to do with banks cashing in to boost their profits (and bankers bonuses). Hence perhaps we need to point our guns directly at the banks and impose a windfall tax…
“The problem was the 15 years of low interest rates.”
Only partly.
More fundamently the problem is the economics of monetarism which has morphed into interest-rate-ism since we first heard the term in Margaret Thatcher’s time.
It’s not a good idea to stimulate the economy by lowering interest rates because it creates too much private debt. It’s an even worse idea to then later try to slow it down by raising interest rates. This turns the high level of private debt into high levels of bad private debt which crashes the economy as we saw happen spectacularly in 2008.
This is very likely what we’ll see happen again in a year or so. It’s rather like slowing down a bicycle by inserting a metal bar into a spoked wheel. Sure, it will do that but not in a good way!
Banks are assessed a higher rate of corporation tax than other businesses on their profits. Currently the rate is 28% versus 25% for trading businesses.
The problem with mortgages is not that interest rates are historically excessive, but that house price and hence mortgage loans have been inflated to unaffordable levels, in large part by 15 years of ultra-low interest rates.
A land value tax on rents and interest earnings from mortgage loans and other loans secured on land has the effect of reducing the income that can be derived from lending on land assets. Reducing the after-tax income that can be derived from land assets reduces in turn the capital value of land and over time the puts downward pressure on house prices. The consequence is such that a high rate of Land value tax suppresses the inflation of house prices and focuses investment on higher quality buildings and more efficient use of land for commercial purposes.
@Joe
I would suggest house prices became “unaffordable” for many in the 1980s.
I brought my first house in 1985 for £30,000 with a mortgage based on x3 income (I was already priced out of my home city as the same house there was priced at circa £60,000). By 1989 neighbours were selling their houses for circa £90,000; wages hadn’t gone up by the same amount so affordability for mortgage purposes was assessed differently. I subsequently sold it in 2004 for £160,000 and noted that this was beyond the reach of someone (in 2004) doing a similar job to that I was doing in 1985.
BTW LVT fails when dealing with the footprint of internet and virtual businesses aka cloud data centres.
With the 12 month delay thing the current median time from claim to repossession is currently over a year anyway so this seems to be of limited utility. Given the general situation in the courts and a likely increasing caseload that is unlikely to come down significantly.
I used to do mortgage repossession cases in the courts. And certainly some banks were very keen not to repossess properties. To the extent that for some lenders I had authority to agree suspended possession orders if they made *any* offer of payment.
There are two aspects though – first the remit of the BoE. Which is basically a one club policy as all they can do is raise interest rates. And this isn’t the 90s – only about 15% of mortgages are on a standard variable rate and a lot more are fixed. So an inteest rate change takes a lot longer to take effect. It’s also not feeding through to unsecured lending or savings rates so neither of those is taking ‘heat’ (not that there is any) out of the economy. Also to factor in in terms of borrowing are the availability of 0% interest deals which I don’t think were around to the same degree in the Uks last inflation surge.
So the BoE raised interest rates to tackle inflation, it didn’t have any effect so they did it again as there isn’t anything else they can do and we are not going to massively over compensate.
As regards the Lib Dem policy. I’m not sure what it actually is! Caron says:
“We have called for a £300 payment to those whose mortgage payments who have gone up by more than £400 per month.”
Though I understood it (from the website) to be more complexly targeted:
“Anyone who sees their mortgage payments rise by more than 10% of their household income would get a grant to cover the cost of that rise for the next year, up to a maximum of £300 a month.”
The latter is quite a bit more complicated, the former a lot simpler and has a much higher ‘can you put it on a leaflet’ score!
(There was a time when the party website had a lot more detail on such things – like the costings Caron talks of! – but seemingly not nowadays)
Those two are quite different but both ignore two things
1) At least a chunk of those people facing steep increases are people on 2 year fixes that are expiring who took advantage of the stamp duty cuts during Covid. Those are people who have already had significant taxpayer help towards the price of their property.
2) How long will this be for? This is not likely to be a short term thing and indeed most projections are that we have not reached the peak of interest rates yet so seems unlikely they will be much below current levels in a years time. It does risk creating a cliff edge when this support stops
Thanks @Hywel. I had rather got the detail of our policy a bit garbled so I have amended it and added in a link to Wendy explaining it.
It seems quite complicated to administer as you would have to means test it.
One thing they could do relatively easily is to return the support for mortgage interest payments to being an actual payment rather than a loan. And widen the threshold it can be paid at.
The Economist journal points out that increased taxes would have a more immediate effect and could be better targeted. Align capital gains with income tax rates, increased inheritance tax and airline passenger duty? It’s noticeable that airline tickets have gone up by more than inflation.
Thanks – that makes more sense (as a policy as well!). The downside is that it will actually help relatively few people by a relatively small amount.
“One thing they could do relatively easily is to return the support for mortgage interest payments to being an actual payment rather than a loan. And widen the threshold it can be paid at.”
Yes – though again this is of limited help as linked to people on benefits. And *most* of those affected aren’t. And that is a relatively short term measure to ‘stop gap’ for people who expect their situation to improve relatively soon (ie have lost their job but are hoping to find work relatively quickly – long term unemployment being something that like high inflation and high interest rates a lot of people have forgotten about).
The other thing that could be done is funding for duty advisors at courts hearing possession cases. Quite a lot happened without people getting *any* advice and TBH if you are properly advised you should be able to end up with a suspended possession order at worst at least at a first hearing.
“We have called for a £300 per month payment to those whose mortgage payments who have gone up by more than 10% of their income…….”
The BoE is owned by government and so is essentially part of government. Therefore it is government policy that mortgage holders and renters (indirectly) should pay more to commercial banks as a part of its counter inflation policy. Just how this is actually meant to curb inflation when the payments don’t actually delete any money from existence isn’t clear. The money simply passes from hard pressed renters and mortgage holders to less hard pressed landlords, bank shareholders and those who lend to the banks who then receive a higher rate of interest.
However, this is the policy we’re stuck with until the message gets across that the policy is fundamentally flawed and needs to be changed. It doesn’t make any sense to use public funds to partially compensate just some of those who are paying out extra money to the banks. The bankers will still get their extra money.
Why don’t Lib Dems come out in total opposition to an ineffective policy? We will need to formulate a new policy. The burden for solving an inflation problem should be equally shared rather than just borne by young families who are the process of buying or renting a home.
Whatever new policy we decide upon, I would suggest that giving more money to the banks should not be a part of it!
Peter Martin 25th Jun ’23 – 10:07pm:
Just how this is actually meant to curb inflation when the payments don’t actually delete any money from existence isn’t clear.
By reducing growth in money supply.
Why don’t Lib Dems come out in total opposition to an ineffective policy?
The policy is effective; most likely too effective…
‘People will be hurt by the Bank of England’s chest-thumping blunder, and for no good reason’ [22nd. June 2023] [*currently free to read*]:
https://www.telegraph.co.uk/business/2023/06/22/people-will-be-hurt-by-bank-of-englands-inflation-blunder/
It is not party policy to provide this £300 per month mortgage support. It has never been passed by Federal Conference. If it had been passed by Conference we would be able to read the policy with its details. It is something the Parliamentary Party is calling the government to do. I think when first proposed (November 2022) we said it would cost about £3 billion.
As Hywel points out it is a complicated policy which does not meet the ‘can you put it on a leaflet’ test.
A better policy would have been to not allow mortgages to be foreclosed as long as the amount being paid is not less than 50% of the monthly payment and that the mortgage is not more than 12 monthly payments in arrears.
Caron,
We already have the policy of returning the Support for Mortgage Interest scheme to its pre-2018 format – turning it from an interest-bearing loan to a benefit payment. I suggested in a motion to Spring Conference (which was not selected for debate) increasing the size of the mortgage to £290,000, which is just over 90% of the average cost of a house in England (which was £316,000 in August 2022). And that the Support for Mortgage Interest scheme be available all people in receipt of Universal Credit.
Hywel points out that the policy of raising the Bank of England interest rate is not as effective as it was in the past because of fixed rate interest mortgages. However, fixed rates have been available for a long time. I remember having a fixed rate mortgage sometime before 2008.
When Rishi Sunak announced his target of halving inflation he should have set a minimum interest rate on savings of 0.5 less than the Bank of England rate. During Covid some people couldn’t spend all of their income because of lockdowns. Increasing the savings interest rates might encouraged these people not to spend their recent savings.
In the past I have suggested introducing a new Income Tax rate on incomes above average earnings and increasing the Additional and Higher rates. Jeremy Hunt should have taken the Economist’s and my advice.
If he had increased the Income Tax rates on incomes above average earnings by one percent every time the Bank of England increased its interest rates in December, February, March, May and June, then the Additional Rate of Income Tax would be 50%, the Higher Rate would be 45% and the new rate would be 25%. These Income Tax rises would have removed demand from the economy and so put pressure on inflation and might be fairer than just using interest rate rises.
@jeff ” By reducing growth in money supply.”
But it doesn’t, in fact it brings more money into the banks who can then multiply it through increased lending and purchasing of gilts etc.
@ Jeff @ Roland
” By reducing growth in money supply.”
Roland is right. It doesn’t.
If I pay more to a commercial bank they aren’t going to destroy the money I give them. Think paper BoE issued banknotes, but of course, the principle is the same for digitally issued money. However, if I have to pay more tax to the government, it is simply collecting more of its own created IOUs and so it can tear them up, or not, as it wishes in the interests of regulating the macroeconomy.
To the extent that paying more to commercial banks might reduce our aggregate spending levels, it can be argued that the wealthy are less likely (perhaps?) to spend it than the less affluent. “Propensity to consume” in Econospeak.
In which case the policy could work just as well, or even better, if we were all required to pay to Mr Gopi Hinduja and Sir Jim Ratcliffe who are reported as #1 and #2 on the UK wealth list.
“However, fixed rates have been available for a long time. I remember having a fixed rate mortgage sometime before 2008.”
True – but that’s not really going back far enough. The UK has not really had an inflation problem since the turn of the 90s. In broad terms its tracked along at 2ish% since then. There were a couple of blips but it never got about 5% (I’m using CPIH) – one of those was 2008 when the banks response was to massively cut interest rates, the other in c.2011 didn’t lead to a change in the base rate.
So you’d need to look back to the mortgage (and loans) market of the turn of the 90s for a comparision of comparable circumstances.
“fixed-rate mortgages were first offered in 1989, and were until the mid-1990s a fairly small share of new mortgage lending. The majority of mortgages were at a variable rate and so the rates charged for new mortgages would move in the same way as rates on the stock of existing mortgages.”
https://www.bankofengland.co.uk/-/media/boe/files/statistics/bankstats-articles/2015/historical-sources-of-mortgage-interest-rate-statistics—bankstats-article.pdf
Jenny
Income and capital gains are different. Taxing them the same ignores the differences, would be unfair and bad for the economy.
In pre Thatcher days there were a range of measures available to reduce money supply, both fiscal and monetary. Thatcher abandoned all except interest rates. One of the more effective ones was special deposits, where banks were required to hold a percentage of their reserves at the BoE and this reduced their ability to lend thus cutting the money supply. Also the BoE bought up government bonds again reducing liquidity. The reserves banks had to hold in cash could also be increased again reducing their ability to lend. Interest rates do have a role to play but wholesale reliance on one tool is never going to be as effective as a larger toolkit
Might it be that those paid for direct work pay 15% (NI) more than those with income from investments and the like?
Might it be that raising the bank rate is avoidably inflationary as the costs and prices of all goods and services which have a debt factor are/will be raised?
Might a silent strategy of H M G be to impoverish, debt-burden and frighten the majority of citizens into subservience and acceptance of lower standards of living?
@ Russell Please explain your unsupported statements.
When applied to financial instruments, capital gains and income are identical. If your portfolio was worth £1m and is now worth £2m it doesn’t matter whether your original assets are now worth £2m or if they are worth £1m but gave you £1m to reinvest. For most rich UK investors, they can avoid much of their income tax by wrapping their investments in an instrument that appreciates rather than paying an income.
@ Mick,
“In pre Thatcher days there were a range of measures available to reduce money supply, both fiscal and monetary. Thatcher abandoned all except interest rates”
This isn’t quite right. Fiscal measures work just the same now as they always have done. The economic austerity that we saw in both the EU and UK in the years following the 2008 GFC ws caused by a misapplication of a fiscal counter inflation policy. So we had low inflation, even ultra low or negative in the EU, caused by the tight fiscal policy even though the stated reason for having it was to “balance the books”. That was never going to work.
Consequently, to try to hit 2% inflation targets, the central banks responded by running a far too loose monetary policy to try to compensate. Covid came along and changed all that!
The USA still has a 10% reserve requirement on its commercial banks. It didn’t do much good in 2008 and it isn’t doing much good now. Their monetary policies are even tighter than ours.
When you use the term “money supply” which is your preferred choice and why? M0, M1, M2…. MB, MZM? Maybe there are others which I have missed out.
@ Peter Davies,
“For most rich UK investors, they can avoid much of their income tax by wrapping their investments in an instrument that appreciates rather than paying an income”.
Very True.
They don’t actually need much of an income as the HMRC would define the term. If you are ultra wealthy it makes more financial sense to borrow using your appreciating assets as collateral. They’ll be no shortage of willing lenders. From their POV it is relatively risk free and would pay slightly better than buying government bonds.
So Lib Dems may want to think about taxing the super-wealthy on what they borrow rather than what they earn, or say they earn.