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Saturday, July 1, 2023

Mortgage Misery - Gross Economic Mis-management

Mortgage Misery

The government's ineptitude in managing the UK economy is leading to misery for hundreds of thousands of homeowners.  These unfortunate people just happen to need to renew their mortgage now as their fixed term deals come to an end at the same time as mortgage rates are rocketing compared to just a year ago. It is pure chance that now is the moment they need to renew. And it is pure mis-management and mis-understanding by the people in charge that has led to this disastrous situation. Disastrous first for these individuals and families. Disastrous for the UK economy as a whole. If there were a crime of gross economic mis-management, our current leaders would surely qualify.

Here are some press extracts and then I will explain why the rises in interest rates are not working, indeed may be counter-productive and what they should be doing instead:

"Britain’s debt pile has surpassed the size of the economy for the first time in more than six decades, ahead of an expected jump in interest rates that will add billions more to borrowing costs." 
The Daily Telegraph 22nd June 2023

"More than 400,000 people will see their fixed mortgage deals coming to an end over the next few months, at a time when lenders are rapidly increasing their rates and pulling deals. How are homeowners coping?
Victoria Watts, who lives with her husband and two children in Norwich, knew her mortgage of £1,300 a month was going to increase but she was shocked to learn by how much.
The 35-year old senior insurance manager received a letter last month saying her fixed-rate deal was coming to an end, and the family would need to find an extra £1,400 a month."

Lisa Ward has lived in the same house for 25 years and hoped to stay there for many more. But the mother-of-two has put her three-bed home in Cheshunt, Hertfordshire on the market after her mortgage rate went up by nearly 300%. "I got a letter saying my mortgage was going up from £289 to £1,150 a month," she says.
BBC News 21st June 2023

Rachelle Gleed, 53, from Bishop's Stortford, Hertfordshire, describes the situation as "ridiculous, scary and very, very stressful". The mother-of-two has a rental property with an interest-only mortgage deal that ends in October and is facing an increase from £500 a month to £1,471.
BBC News 21st June 2023

Why raising interest rates doesn't tame inflation in the UK

The Bank of England, supported by the government, have increased mortgage rates 14 times over the last 18 months, taking typical rates for borrowers from around 2% to 6%. That means anyone renewing their mortgages now could be faced with a near tripling of their monthly bill.

Bank of England

About 30% of households have borrowed to buy their homes and of these, some have fixed rates for a number of years. As a result, a relatively small number of people are having to renew now or soon at today's high rates. There are roughly 30 million households in the UK so the 400,000 who are currently being penalised, destroyed, by new payments that are up to 3x higher represent a tiny fraction (less than 2%) of all UK households. There are probably another million mortgage holders who are on variable or tracker rates who will also see an immediate jump in their rates. So all together these households represent about 5% of the total. Yet these are the people who supposedly will make inflation drop by massively squeezing (eliminating) their disposable income. It's true that the higher rates will lead to higher rental payments for some of the 40% of households who rent, but that will take some time to filter through as they are on annual contracts or on protected local authority rents.

Firstly, you can see that raising interest rates to tame inflation is a very blunt tool that takes a long time (years) to impact (hurt) a majority of households.

Secondly, people with mortgages tend to have better paid jobs and in a market where we have labour shortages, they are in a stronger position to demand pay increases to help cushion the blow. We are seeing this with wage inflation spiralling higher than ever (at over 7%, this is the largest growth rate seen outside of the pandemic period). It is caused in part by rising interest rates and is driving core inflation - the precise opposite result of what the government wishes to achieve.

Thirdly, given the huge delay factor that higher interest rates have on impacting the economy, by the time they do eventually start to bite (when a significant proportion of households start to feel the pinch), we will be in recession and the opposite medicine will be required - a lowering of interest rates - and quickly. Alongside this we already see businesses starting to cancel their investment plans due to high interest rates and lack of confidence in the economy and so the downward spiral accelerates.

What should be done instead

If there really is a view that people's spending needs to be reigned in to cool the economy and to reduce inflation, then a more equal and effective way to spread a little pain across society, with a higher burden falling on those able to pay (rather than a few with mortgages), then the tax system can do this almost overnight. However, I think we should question whether the problem (of high inflation) is really resulting from people's propensity to spend spend. I think it is more driven by external factors such as very high energy prices, higher food prices as a result of global shortages (caused by war) and a shortage of workforce driving up labour costs. Brexit has reduced the number of EU workers in this country and has increased the costs of imports significantly. Most people are already feeling the pinch, so increasing interest rates is a highly unfocussed tool and it won't work.

One of the members of the Bank of England's interest rate setting committee appears to agree with me:

"LONDON, June 29 (Reuters) - The Bank of England has no need to raise interest rates further to curb inflation, and risks having to make a sharp U-turn if it tightens policy any more, BoE rate-setter Silvana Tenreyro said in her last speech as an official at the central bank."

In China, the government is cutting interest rates to stimulate the economy:

Perhaps I am wrong, and the Chancellor and the Governor of the Bank of England are correct, and it is indeed people's abundant income combined with a scarcity of products and services that is driving inflation. Let's review in a year's time!

Quote for the Month

Piers Morgan was asked about Prince Harry's current legal challenge: "I wish him luck with his privacy campaign and look forward to reading about it in his next book." June 2023

"The Western policy of procrastination has run out of tomorrows." Leading historian on the pre-WW2 negotiations with the Kremlin.

Monty Python sketch from 40 years ago - some things don't go out of date!

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