By Andrew Mullineux, Emeritus Professor of Financial Economics, Centre for Responsible Business and CHASM
The interest rate increase by the Bank of England’s Monetary Policy Committee on 22 June in response to persistent inflation seems unlikely to be its last. Mortgage rates have returned to the peaks reached last autumn and government bond rates have climbed as the UK’s fiscal outlook has deteriorated – in part due to the rising cost of servicing outstanding government debt.
Calls abound to help households faced with rising standard variable mortgage rates or those coming to the end of their low-rate fixed-term deals, who must now re mortgage at significantly higher rates. The main lenders have reaffirmed with HM Treasury and the Financial Conduct Authority (FCA) that they will deal sympathetically with stretched borrowers on a case-by-case basis, including lengthening mortgage repayment terms and offering temporary ‘interest only’ periods. The poorest borrowers with the lowest equity will need the most help with rising mortgage payments. Recent revisions to Universal Credit may help somewhat, but more may be required in line with the £3bn special fund proposed by the Liberal Democrats.
But what about renters? Where are the similar calls and proposals to help them with their dizzying rise in costs? Certainly, those homeowners who are repossessed or are forced to sell will face difficulty finding affordable rented accommodation in their desired areas because rents in the private sector have been rising steeply and social housing is also severely overstretched. This may be in part because ‘buy to let’ landlords have been passing on the rising costs of their interest-only mortgages. They also face uncertainty regarding their responsibilities under the Renters Reform Bill, which could lead more to cash in and reduce rental supply further.
While many members of ‘generation rent’ have been struggling to get a foot on the ‘property ladder’, other renters have little or no prospect of doing so since ‘sub-prime’ mortgages became unavailable after the 2007-2009 financial crisis and tougher affordability checks were introduced. Home ownership since the financial crisis has declined, although the proportion of homes owned outright (33%) exceeded the proportion with a mortgage (29%) for the first time in the 2021 census. The private rental sector accounted for around 20% and social housing approximately 17%.
Around 74% of mortgages are fixed, of which around 57% are due for renewal in 2023.
Followed by pensions, housing is by far the largest component of household wealth, and so renters are generally less wealthy – even though many young professionals have above average income. There is therefore a stronger case for targeting help at renters on low incomes than more wealthy mortgaged homeowners. Meanwhile, local housing allowance rates have been frozen since 2020, saving HM Treasury considerable sums. This could be used to increase support through Universal Credit and debt advice provided by the Money and Pensions Service. Any targeted support for relatively poor mortgaged households, with little or no – or even potentially negative – equity could therefore be matched for broadly equivalent households in the rental sector.
And those households under financial pressure are increasing all the time. Inflation, through frozen tax thresholds, and allowances, is reducing the ‘take-home’ portion of wage increases squeezing ‘disposable’ (after tax) incomes. Mortgage and other debt interest payments and rent increases further reduce ‘discretionary’ (after tax and expenditure on essentials) incomes; which are being further squeezed by cost-of-living pressures from rising grocery prices, even as energy and fuel prices have abated. High childcare costs are also adding to pressures on many households.
The continuing fall in ‘real’ (adjusted for inflation) disposable and discretionary household incomes seems likely to add to pressure for a rise in ‘living’ wages.
Further increases in interest rates may well be required until a fall in living standards for many is accepted. The rises being seen as necessary to break the wage-price spiral and bring inflation back to its 2% target. In the interim, the Prime Minister has pledged to reduce inflation to a rate of around 5% by the end of the year.
Unemployment may well increase if a severe recession results, pushing up repossessions – albeit with a lag. The case for targeting assistance at the poorest and most vulnerable is therefore clear – whether they rent or pay a mortgage.
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The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham.