The impending mortgage crisis is becoming the biggest issue in the economy and politics in the UK. With millions of homeowners due to renew their mortgage deals in the next 18 months, and with the government seemingly determined to support the Bank of England's reckless policy of forcing real interest costs ever higher, the reality of many of those households simply being unable to afford the costs that they will be asked to pay is coming ever nearer. A social crisis, a banking crisis and a recession all follow, in all likelihood.
What is this government's reaction? This was Gove on Laura Kuenssberg as reported by the Mirror:
He added:
The same old utterly illiterate economic arguments, then.
For even hinting that there might be support, he was, however, firmly slapped down by Jermeny Hunt later in the day, as the FT reported:
The very obvious answer is, of course, to cut interest rates.
On the other hand, if this is deemed impossible, let me offer a simple way in which help for those with mortgages might be found.
The interest paid on the central bank reserve accounts that commercial banks hold with the Bank of England will have increased by more than 4.5% in less than two years by the end of this week. Not one penny of this money was created by the banks. It was, in effect, gifted to the banks due to government money creation during the 2008 and 2020 crises. It saved these banks from insolvency then: it might do so again in future. The balances are now approximately £900 billion. That means that more than £40 billion a year is paid in interest by the government on these accounts now. That is wholly unearned profit for the banks, not least because they also did nothing to earn the additional sums now paid on these accounts as they have no control over the interest rate paid. I suggest that this income should now be taxed at a rate of at least 75%, and maybe more. That would provide a £30 billion or so additional return to the government. That should help with providing mortgage assistance.
If they need more, come back to me. There are more ideas to offer if required.
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Yes. Well said!
Dusting off my PhD in the Bleeding Obvious it seems to me that the root cause of this crisis is the way that Property Price Inflation has been encouraged by the Powers that Be.
Clearly what we do need are controls on the amount that can be borrowed and a commitment to end House Price growth – as advocated by none other than the Right Wing Tory Bow Group.
My own home was built in the mid 1960’s and would cost no more to put up today than it did then but relative to earnings its price has increased by about 400%
I think you are a bit wrong there. My home was built in the mid 60s, too. Reroofing it last year cost three times more than the home we bought in the mid 60s. In the mid 60s we were earning less than £10 a week, and I know builders are earning a lot more than that now, so your logic is a bit amiss there.
Banking is a useful servant and a bad master.
Just read Ann Pettifor: The Production of Money: How to break the power of the Bankers.
Gove and Hunt need to read it too.
The problem is over 45 years of poor housing policy neglect of council and other social housing resulting in very high prices in proportion to income for most.
Any subsidy to mortgage payers without any similar relief to renters would also be manifestly unfair.
There is no shortage of housing as such but the housing stock is under used due to second homes and properties on short let like air bnb as well empty and uninhabitable housing. Reform of council tax to tax empty property and the gains from short lets would give councils more I that could be used the money to refurbish empty and uninhabitable properties and rent out under council control
According to Jeremy Hunt’s register of interests, he owns 7 buy to let properties to rent in Southampton, half share with his wife, through Mare Pond property company. However, if you look up that property company it is owned and has been since 2017 by a Ge Guo, who is not his wife, Lucia Guo.
Hunt actually ‘forgot’ to tell the standards committee about them when he was health minister! Now he is chancellor he has obviously forgotten to tell Companies House.
Your point about vested interests is well made. But Lucia Guo and Guo Ge are probably the same person.
Of course, Hunt could have been very modern and has taken his wife’s surname – Guo. Perhaps Ge is short for Jeremy n Italian?
Banks should be a good source of funding, but I’m not sure that a mortgage support fund would be the way to go. How about a mortgage cap for people (particularly 1st time buyers) only buying their own home and no other properties? Fixed rate mortgages at 2% for the term (same as inflation target).
I tend to agree
I was just answering a specific issue
Lifetime mortgages are the right way to go too
Mortgage rate caps already exist in France.
If instead of pushing rates to 5% they went to 2% and made a windfall tax on higher earners, that would be a fairer way of trying to slow the economy. It will not bring inflation to target of course but central banks will never admit something like that anyway
“….It was, in effect, gifted to the banks due to government money creation”
You’re referring to the process of QE?
The BoE bought bonds on the secondary market. It was an exchange of pounds for gilts or bonds. So they finished all square afterwards.
The commercial banks, and others, sold their gilts to the BoE. So they were all square too.
The Government then sold new gilts into the primary market. Some of which were bought by commercial banks. The banks were all square on these deals too.
So I can’t see how any gifting was involved.
For heavens sake Neil learn how money craetion works
The central bank reserve accounts were not created by QE, they were crreeated by spending
The QE was just a sham (I agree) to cover the creation of the money – and it was that unrecovered spending that created the CBRAs
You rae becoming an embarressment to MMT
What part has Neil got wrong Richard?
Banks owned gilts. Those gilts were then purchased by the BoE for cash at market rates.
So the banks didn’t get “given” or “gifted” anything. Simple double entry accounting should tell you that.
Claiming otherwise is wrong and what you are doing is spreading an outright lie.
You’d be so much more credible if you did not post multiple comments in multiple names.
You’re also completely wrong – as a new post will show soon.
That’s uncalled for in my opinion.
It is not: it’s right
I. will do a blog to explain. I am bored by this “aset swap” claim that ignores why it happens.
Interest on CBRAs was created out of the 2008 Crash. Before then it didn’t exist. It is a specious and unnecessary creation of the clumsy fix to a failed system. It is and was not the only way the problem of QE could have been fixed. Even if the ill chosen apparatus had been broadly used, it could have been done differently, without the free gift.
There is no substance to it, and the commercial banks can’t justify it (the case against is well established, in various forms). I look forward to Richard’s fresh Blog on the issue.
Actually, it began in 2006 John
“Actually, it began in 2006 John”.
Whittaker also mentioned 2006 in a short 2012 paper, but that was for a much smaller level of reserves, and within narrow operational parameters. The Crash changed everything. Here is what you said last year:
“Second, note that before 2007 there were almost no such balances, at least in total. The commercial banks and the Bank of England sought to achieve this result each day but used other very short-term overdraft and loan arrangements if that was not possible at that time. The current situation where all CBRAs are, in effect, bank despot accounts held by the UK’s commercial banks as a mechanism to guarantee their ability to make settlement to each other is almost entirely a creation of the post 2008 global financial crisis as a result.” (Taxresearch.co.uk; ‘How are the central bank reserve accounts created?’, 17 June, 2022).
I accept those pints John
Reserves were less than £20bn in 2007, from recall.
iincidentally, “bank despot accounts” pretty much sums up commercial banking.
🙂
“So I can’t see how any gifting was involved”.
The interest paid on CBRAs is a free gift to the commercial banking sector. The commercial banking sector and its apologists object to criticism of the commercial banks for taking this unwarranted privatisation of the seigneurage of the sovereign currency issuer, but of course it does not apply the same standards within the commercial sector. Commercial banking is simply a two-way rip-off of both central bank and public: we are not supposed to notice, because you can fool most of the people most of the time; and the rest of the people can do nothing about it. And that is the sum and substance of commercial banking.
My letter to the local paper sent this morning
Sir,
I have had a number of leaflets through the door promising various forms of plagues of Biblical Proportions if the proposed Packsaddle Development in Frome goes ahead.
I live down the road from the site, my house was built in the mid 1960’s when average house prices were about 3 times earnings. Now its nearer 12 times, despite the fact that building costs have risen in line with inflation since then.
So somebody is making a great deal of money from this while our children cant afford to buy and end up paying private landlords mortgages instead.
At the same time on many parts of the Country as many properties are being bought as second homes or AirBnB’s as are being built while in London the property market in increasingly dominated by non UK residents who are looking for a safe place to put what is all to often ill gotten money. In fact as recent local cases have shown property has been used by UK Criminals as a place to hide the proceeds of their crimes.
Might I suggest that before we start building more property we ask some serious questions about who is allowed to buy land and property in the UK & what they are allowed to do with it? Basically if you want to buy a home to live in thats fine, if you want it as a second home/AirBnB/moneybox whatever the answer is no.
In case anybody thinks that I am a dangerous lefty (I am!) the Right Wing Tory Pressure Group, the Bow Group has proposed that the Government should set a target for average house prices of 4 times earnings and restrict the use of residential property for ‘non residential’ uses.
Yours Faithfully
Well done…
Frome has six Somerset Council councillors, four of whom are Green and one has been introduced to this blog by me. He found it useful. It would be good to have an MP who has some understanding of MMT.
The really sad part of that development John is that no-one is objecting on the grounds that there will be too few houses. If we have to share our land more and live closer to towns and infrastructure that already exists so that public transport is more realistic then houses have to be built taller.
We live in a world where people are objecting because of a lack of affordable housing.
And no-one wants to build to 8-storeys+ which would make housing more affordable.
We as a people are doomed.
I have mixed feelings about this. For many years I have felt that there was always going to be a likelihood that one day people would pay the price for the UK’s ludicrous obsession with rising house prices. That day is upon us.
Here is the reality. 1) House prices have for years increased at rates above CPI and RPI inflation. 2) House prices are not included in any inflation index because they are seen as an “asset”. 3) IR’s have been low for years because of an inflation index that is mostly made up of tat and things people don’t need. 4) Inflation on things we need, like a roof over your head, has always been higher and they are not counted in the inflation indices in proportion to what people actually have to spend on these need items. 5) House price inflation benefited from that low IR environment coming from inflation indices that didn’t include house prices as part of the measurement! 6) Mortgage rates were therefore low for years because IR’s in general were low.
Conclusion? It was a recipe for house price inflation to boom. A recipe for disaster, now baked into the cake.
The response of Government, mostly Tory who are the architects of this disaster, was always to prop up prices with various schemes to help the priced out. Unfortunately, Labour play by the same blueprint. We have been in a housing crisis for years based on affordability, or lack of, both in terms of buying and renting. The Neo Liberal elite don’t care.
Now here’s the problem. Should the Government “bail out” people who bought into the “house prices only ever go up mentality of the last forty years” and the “well, IR’s will always be low so we can afford it mentality”. Everyone has been conned.
Now, I have no desire to see people facing a personal crisis brought about by a system that lies to everyone, and I know there is a bigger picture alternative beyond sticking plaster economics which Neo Liberalism seems to specialise in, but there is a danger. Let’s call it a new form of moral hazard here. Just to let the system bubble up again until the next crisis?
Should private landlords be bailed out? Apparently Landlords are also facing problems.
According to the Daily Torygraph, Landlords are paying the highest price in Britain’s mortgage meltdown
https://www.telegraph.co.uk/property/buy-to-let/landlords-mortgage-payments-interest-rates-crisis/
Well, they would say that, but it is an important question because of the total lack of affordable housing to rent. Again, totally neglected since Thatcher sold off the council house stock. And the biggest question of all, what about their tenants, the renters? A bailout for mortgage holders, and perhaps Landlords would get it next, while renters crash and burn and get no help. Because right now renters are facing and have been for the last couple of years big increases in their rent. I have not seen any media interest in helping renters.
Any specific bailout type of help just for mortgage holders would set a massive moral hazard precedent that would clearly divide society into the property haves and have nots. It would be saying, you are a renter, you are a second class citizen. Nothing more than a wage slave to the property owning class. I can only imagine the anger that would come from that, as I am a renter. I already feel that I have less rights than others. I have a social conscious, but I would struggle with a homeowner and certainly a landlord bailout. A property owning bailout. I just feel that it is disgusting that the Neo Liberal system has brought us to this. Sorry.
The answer has to be co-ownership
The path back to sanity in otyher words….
I will think about it
The real issue of course was that Buy to Let was treated as a business loan rather than an investment product with all sorts of highly predictable consequences.
That oif course and the absence of any form of regulation for Estate and Letting Agents, unlike Ireland.
Indeed John: my daughter has been looking to go to university in Ireland in the autumn. Through her father she gets the same deal on tuition as local students there. Anyways she’s been looking at accommodation with two potential flat-mates during half-term here and found availability and price in Ireland very agreeable.
You amaze me
Ireland has a massive rent crisis
Where is she looking? The West is doing better.
County Cork. Costs are always relative, she works and doesn’t drink the MUP stuff, so what’s in her budget will not be the same as when I was a student. But it’s quite reasonable compared to Oxfordshire.
Cork will be a lot better than Dublin
There are lots of mortgage holders who will be in real difficulties but renters face even more problems – as rents are also going up with interest rates, as buy-to-let landlords recoup the extra they are paying. At least mortgage holders are in the process of building up an asset, unless the housing market collapsess, that is and they end up iwth negative equity.
I entirely agree
Even with negative equity they will still eventually have an asset.
Every car in the country depreciated the second it was first driven by it’s new owner. It doesn’t mean cars aren’t assets.
Given that the people most likely to be struggling with their mortgages are those with the highest value homes any sort of support would be almost comically weighted towards the affluent. It would be publicly unjust to a degree never seen before in this country.
I’m half hoping it happens just for the uproar it will cause. I don’t think it will though. Sunak and Hunt know they are passing over to ideological bedfellows in Starmer and Reeves and are likely to make some hard decisions in their final months. They and we know they will be richly rewarded for it by the capitalist class just like Blair, Obama, Johnson etc.
Sorry, but your assumption makes no sense
“Given that the people most likely to be struggling with their mortgages are those with the highest value homes any sort of support would be almost comically weighted towards the affluent.”
People most likely to struggle are those with a high loan to wages ratio. The house price to wages ratio in London is 11 to 1 versus 4.8 to 1 in the North England. It’s obvious people in London who rely on their wages to pay their mortgages will find it far harder to afford to refinance from 2% to 5.5%
Borrowing itself has become completely crazy in terms of ability to get a loan without currently have a fixed income seemingly was impossible even for a basic overdraft or a small loan on the basis of a security of cash awaiting a signature to release it wasn’t possible.
There is however a level of the buyers being offered sweeteners to take higher risk mortgages to protect the lenders. They still have financially gained over the renters and immediately we talk about transferring state debt to bail out the lenders.