TThere is a widespread agreement among all political parties in Britain that the country should promote home ownership as a property-owning democracy. Currently, 7.5 million individuals hold a staggering £1.7tn of mortgage debt. However, this debt is highly vulnerable to short-term fluctuations in interest rates, making millions of households susceptible to severe financial hardship when rates suddenly rise. This lack of responsibility and disregard for the well-being of borrowers is nothing short of criminal negligence.
By December of next year, approximately 4.4 million households will have been forced to refinance their mortgages at significantly higher rates since the Ukrainian crisis and the subsequent rise in interest rates began last February. Two-year fixed-rate mortgages, which were previously available at under 3%, now cost close to 6%. The Resolution Foundation think tank estimates that mortgage holders’ annual payments will increase by £15.8bn as their fixed rates come to an end. Given that very few households have more than £2,000 in savings, the Institute for Fiscal Studies predicts that 2.9 million mortgage holders will deplete their savings entirely.
Unsurprisingly, public trust in the Bank of England and its management of inflation and interest rates has reached an all-time low. Last week, Governor Andrew Bailey acknowledged mistakes had been made during his testimony to the House of Lords. However, instead of focusing on institutional reform or innovative solutions to reshape the mortgage market, Bailey blamed the Bank’s economic model, which clearly resulted in incorrect forecasts. He promised an internal review of the Bank’s operations.
An internal review is insufficient given that Britain is currently experiencing the sharpest and fastest rise in interest rates since the 1980s after 13 years of rates below 0.5%. This unique feature of Britain’s mortgage market places borrowers at significant risk from interest rate fluctuations. A comprehensive investigation into the structure of British finance is necessary to ensure fairer outcomes. Further, economic policymaking institutions need to undergo a makeover.
Neither the governor nor the chancellor seem to understand the intricacies of the British mortgage market. Over 95% of mortgages in the UK are either variable or two-year fixed rates, leaving borrowers more vulnerable to the impact of rising interest rates compared to other countries. Liberal Democrat leader Ed Davey proposes a £3bn emergency mortgage protection fund, which is a small step in the right direction but fails to address the root causes of the problem. Borrowers should not be subject to sudden mortgage withdrawals or unaffordable price adjustments.
The solution lies in drawing inspiration from Franklin D. Roosevelt’s New Deal and implementing a similar approach in Britain. While American mortgage rates have also been rising rapidly, over 80% of them are fixed for 15 to 30 years, shielding the majority of borrowers from short-term rate increases. This was achieved through the creation of public agencies that provided direct loans with fixed rates or served as backstops for private mortgage providers, allowing them to refinance existing mortgages or offer new ones on more favorable terms. The US government effectively guarantees mortgages and enables risk sharing, resulting in widespread availability of fixed-rate mortgages for extended periods.
Rather than proposing a £3bn mortgage protection fund, British policymakers should consider establishing new public agencies capable of refinancing and guaranteeing up to £500bn of mortgage debt. This would establish 20- or 30-year fixed-rate mortgages as the new standard.
The Bank of England’s economic models have proven to be inaccurate. Over-reliance on models that assume perfect market conditions and all-knowing economic agents leads to forecasting errors with significant consequences. Such conventional thinking hinders the exploration of alternatives, such as the establishment of a British version of Fannie Mae or Freddie Mac. If there is a demand for long-term fixed-rate mortgages, the market alone will not adequately fulfill it. Andrew Bailey would gain more public trust by challenging hyper-conventional thinking and exploring innovative solutions.
The current economic situation calls for imaginative solutions. The lack of coordination between fiscal policy, determined by the Treasury, and monetary policy, overseen by the Bank of England, exacerbates the crisis. Additionally, the Climate Change Committee, responsible for achieving net-zero emissions, adds another layer of complexity. The absence of a framework to align these demands with existing fiscal plans and the management of national debt, quantitative easing, and short-term mortgage debt highlights a flawed institutional structure grounded in simplistic economic thinking.
To address these issues, we need more than just an internal review of the Bank’s economic model. We must reform the structure of the UK mortgage market and improve coordination and management of fiscal, monetary, infrastructure, and climate change policies. Continuing on the current path will lead to individual suffering and stagflation. Like Roosevelt, the Labour party, known for its fiscal prudence, must embrace institutional creativity to revitalize the economy. A UK-style New Deal is essential.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
