Back in 2007 comedian Susan Murray phoned me up with a question.
She was just arranging a new mortgage and she wanted to know where I thought interest rates were going. She was deciding whether to get a fixed or a variable rate mortgage.
I wasn’t sure, of course. But I did think there were underlying problems with the economy – quite serious ones – and the safest option, if there was an affordable option on the table, seemed to be a fixed-rate mortgage. Then, in the event something goes seriously wrong in the broader economy, she was protected against the possibility of rising interest rates.
Susan went and fixed her mortgage at 6%. Turned out it was pretty much the top of the market for mortgage rates. They duly plunged as central banks slashed rates and then printed money following the financial crisis.
She’s never forgiven me. “Cost me a ruddy fortune that bloke” she always complains whenever my name comes up.
Cheaper mortgages mean more expensive houses
By September 2021, barely a year ago, you could get a five-year fixed rate deal for 1.3%. It seems inconceivable today that money could be so cheap. To be fair, it seemed almost inconceivable at the time. No wonder everyone levered themselves up the eyeballs.
We have long argued on these pages that, more than anything, it is cheap money that has driven up house prices.
Everywhere you look the standard solution to unaffordable housing is that we need to build more, especially in and around London. But London has been a building site for a decade or more. Goodness knows how many new build flats there now are, but the construction hasn’t brought prices down.
Between 1997 and 2007 the housing stock grew by 10%, but the population only grew by 5%. If house prices were a function of supply and demand, they should have fallen slightly over this period. They didn’t; they rose by more than 300%.
Then you see that mortgage lending over the same period went up by 370% and you quickly realise it was newly created money that pushed up prices in a decade of loose lending, which gave birth to the national obsession that is house prices. Houses were no longer places to live, but financial assets.
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Mortgage lending doubled again in the ten years from 2009 to 2019 and house prices rose by over 50%.
Cut off the tap that is cheap money, and house prices will quickly come to levels concomitant with earnings. The two have long since been distant friends.
In 1995 the house price to income ratio was three – even in London. Now it’s seven. The average house is seven times average income. In London it’s 11. And we wonder why families have got so small.
Interest rates are only going one way from here
With inflation spiralling, bond rates rising and the US dollar spiking, money is suddenly not so cheap any more. And it’s getting more and more expensive. The UK is not alone in this, by any means, but the problem is more acute here because our economy is so geared to house prices.
The Bank of England has made an absolute mess of protecting the currency, declaring it will not hesitate, while hesitating. Rather like the way it broadcast its gold sales to the market between 1999 and 2002, thereby sending the gold price to all time lows around $250/oz, so it is now broadcasting its gilt sales and quantitative tightening – and it has sent that particular market plunging too.
The announcement sparked the sharp sell-off in gilts that began the day before Chancellor Kwasi Kwarteng’s mini-Budget. It’s as though the two departments – the Treasury and the Bank of England – don’t coordinate.
All this means interest rates are only going to go one way, and that means the cheap money taps that drive house prices to such unaffordable levels are now being turned off.
The UK housing market, particularly in and around London, has been an irrational, insatiable monster for decades. Anyone who calls the top has ended up with egg on their face. But we are levered up to the eyeballs.
It’s not just a matter of no more cheap money coming in. There is also the other side of the coin, something I remember from 1989-1993. People can’t make their interest payments, so they start to sell. If house prices come down 10% or 15%, it’s often the case that the house becomes less valuable than the debt – negative equity strikes.
I really like Kwarteng’s Budget. I think he has made the right choices. But a falling housing market, no matter how much growth there is elsewhere, will see the Tories kicked out at the next election. How do they prop up the housing market without cheap money? They’ll find a way. They always do. Or will they?