I took out a mortgage to buy a small flat in Bloomsbury in 1978.
The two windows, bottom right, were mine; sitting room with bay window and bedroom window. The mortgage was £12,000 at a variable interest rate, supposed to be 8% but interest rates were rising and had gone up before I made my first payment. The peak was 15% and it was not until the early 1990s that they came down to single figures.
For the last thirteen years borrowers have got used to rates being barely above zero. Now the bank rate is forecast to hit 7% and inflation 18%. You know energy and grain prices have risen because of the war in Ukraine fuelling inflation.
The bigger picture is illustrated above and it shows how weak the pound is today. Remember November 1967? Harold Wilson, Labour Prime Minister, reassured us: : “From now the pound abroad is worth 14% or so less in terms of other currencies. It does not mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.”
Weak sterling may be good for UK exports, making them more competitive with international competitors, but it is painful for importers. It is not just oil, gas and grain – everything coming from abroad costs more. Those in work can try and get higher wages but pay rises will not match inflation and those pay rises fuel inflation in a vicious circle. Those relying on income from cash (fixed income) are in much worse trouble. There’s no easy solution to these woes, except if possible to reduce borrowings and cut spending. (The individual faces the same budget issues as the Chancellor and the Treasury.) In practical terms this means cutting back on foreign holidays, eating out less, and turning down the thermostat this winter. Savers like me who invest in stocks and shares may see higher dividends but not up enough to anything like match the rising cost of living.
It’s a big worry for many but we have seen it all before as the charts above show. I sold the flat in 1984 for £50,000 and traded up. Number 56 cost £60,000 and I increased my mortgage to £26,000. The mortgage is long since paid off and London property prices have outpaced most other investments. Of course Number 56 is no investment; it is a place to live that costs money to maintain.
As an American expat, I am continually puzzled by the fact that English borrowers are not offered long term (e.g.,20/30 years) fixed rate bank mortgages as are available in the U.S. At the October 2020 Conservative Party conference, even Boris Johnson advocated for long term fixed rate mortgages: “We believe that this policy could create 2m more owner-occupiers, the biggest expansion of home ownership since the 1980s,” and, yet, nothing has happened to meet that goal. The U.S. mortgage market is able to extend long term mortgages because Congress created the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), specifically tasked with providing liquidity to the mortgage market. Question: Why doesn’t/can’t England create similar government sponsored entities? Where is the political will to solve at least part of the staggering housing crisis in England by looking abroad to see how other countries have created an environment whereby buyers are not forced every 2/3 years by bank lenders to renegotiate their loan rates?
Wow, interest rates would be a killer if they hit 15% in the current crisis. Yes, very little one can do on a fixed income other than cut back. £12,000 for a flat in Bloomsbury in 1978, beggars belief what it must be worth now.