Location, location, location! Grand design! Home in the
sun. Yes, those house and home TV
programmes are still going, but maybe not for much longer.
Last week, the Bank of England hiked its interest rates, yet
again, to 5.75%.This was the fifth rise
since August 2005. And the head of the
bank, Mervyn King, said that "further action" on interest rates could be
necessary. Most observers reckon the
interest rate that most borrowing and mortgages are based on – the bank rate –
will go to 6% or more by the end of this year.
Already, the recent hikes have meant that the cost of
typical £125,000 mortgage is now costing £130 a month more than this time last
year. As much as 44% of the income of
the average household is now being swallowed up by mortgage costs. Many households have fixed-rate mortgages
that are unaffected by the bank rate moves. But 2.8m families will see a sudden jump in costs when their fixed rate
schemes come to an end over the next year.
The bean counters (accountants) Price Waterhouse Coopers
calculate that the burden of debt for the average UK household has now reached
19% of disposable income, a record level, passing the peak reached in the high
interest year of 1990. Indeed, average
household income rose 5.2% from 2004 to 2006. But after paying for higher interest-rate costs, the rise in income was
just 3%. After taking off the rise in
prices over that period, it means that most British households have not
improved their standard of living since 2004 because of the rise in housing
costs.
We know that British families have accumulated £1trn in debt
at the last count. Of course, they have
the value of their homes to put against that. But as the cost of servicing their mortgages rockets, the burden of
financing this huge debt will rise even further.
The Citizens Advice Bureau, a body that must deal with the
problems when people get into too much debt, announced that 2007 could go down
as the worst ever for Britain’s debt crisis. Personal insolvencies will reach a record surpassing last year’s record
of 107,288 bankruptcies. The Bank of England is hiking interest rates because it is
worried that the property market is getting out of hand again. In the leafy streets of Chelsea and
Kensington where the super-rich Russian and Arab émigrés buy their property
with wads of cash, prices have rocketed 30-50% in a year. But in the rest of the normal world, prices
are not really moving up that much. They are already at levels that make it impossible for most young people
to get on the ‘housing ladder’. And now
with the cost of mortgages rocketing, all hopes are gone.
The real problem is not just the very rich driving up house
prices with their tax-avoiding bonuses and illegal funds (that Gordon Brown’s
treasury did nothing about). It is not
just excessive demand for property but the lack of supply. Back in the 1950s and 1960s, people on a
working wage could expect to get a decent home through the council. It may not be much but at least it was
adequate and at an affordable rent.
But now in 2007, that is cloud cuckoo land. It is a sorry state to say that in the 21st
century in Britain, young people are forced to stay with their parents or
in-laws up to their mid-30s before they can get a flat at some extortionate
price or rent.
The reason is yet another part of the destruction of the
public sector and the welfare state that successive governments, both Tory and
New Labour achieved in the 1970s and 1980s.
House building peaked in 1968 under the Wilson government
when 426,000 homes were built, of which local councils built 46%. Council house building declined under the
Callaghan Labour government, but of course it was really killed off under
Thatcher. Building stopped and the
existing stock was sold off at knockdown prices.
Council building is now virtually zero. It was supposed to be replaced by ‘social
housing’ with building by housing associations. But housing associations build only 20,000 a year, the same rate
back in the 1960s – and indeed half the rate of the 1990s.
New home building is now totally dependent on private sector
building for profit. And this they have
failed to do.Last year, they built
about 180,000 new homes (mostly flats not houses), still 20% below what they
managed 40 years ago! And of course,
these are for phenomenal prices, out of the reach of 35% of people not on the
housing ladder.
The destruction of the public sector housing programme by
the Tories and New Labour together helped create the housing crisis for
majority. The population is bigger now
than 40 years ago and yet house building now is just 40% of that achieved in
1968. Moreover, back then nearly half
was for low rent accommodation that the poorest could afford. Now over 90% of new homes are at
astronomical market rates and low-rent new homes are almost non-existent.
New Labour under John Prescott talked Blairily (lyingly) of
building more homes. But these were to
be mainly in the south-east where everybody is already suffering from
overcrowding, noise and traffic. The
regeneration of more lowly populated areas was ruled out because there are no
jobs there. Why were there no jobs? It’s because British capitalism is now so
lopsided towards finance over industry that incomes, jobs housing and the
environment are bent towards the south-east.
Our new New Labour prime minister, Gordon Brown, has claimed
that he is a builder. Yet it was as
chancellor that he presided over the worst slowdown in home building the country
has ever seen. The Treasury so
ruthlessly throttled the flow of funds to councils and housing associations
that we now need 23,000 new homes year just to keep up with the demand for
low-rent accommodation and we aren’t getting them. In 2001, Labour presided over the lowest building rate for new
homes since 1945. The 2012 London
Olympics is supposed to revive a corner of East London with 40,000 new
homes. That target has now been cut to
9,000.
Higher interest rates means suffering for many families in
debt payments. But there could even be
worse, if it causes house prices to fall as in the US. Then there is a double whammy, higher
mortgage costs and falling house prices.
In the US, house prices have been falling for the first time
since the Great Depression. As a
result, many borrowers who either engaged in speculating on buy-to-let house
purchases or were just lower-paid first-time buyers have been increasingly
unable to pay and are selling up at prices below what they paid for. As a result, they are defaulting on their
mortgages.
US banks have been lending to these people without even
checking on whether they can pay their loans back because they expected rising
house prices to cover any problems. People borrowed by just ‘certifying’ themselves on their level of income
and this was not checked.
Loans or mortgages in this ‘sub-prime’ market were huge
during 2005 and 2006 in the US (25% of all mortgages). Now the default rate on these loans has
reached 14% and set tot rise to 20% – one in five of these borrowers are going
bust.
And even more serious crisis beginning to come out of the
bushes. The US financial sector has
been doing big business laying off these loans to others in batches of debt
called collateralised debt obligations (CDOs). CDOs were good business because they incorporate huge fees and they were
supposedly backed up by the rising value of property. But now all is turning sour and banks, hedge funds and other
mortgage lenders who bought CDOs are getting into trouble. The big investment bank Bear Sterns had to
announce the closure of its CDO hedge fund with billions lost. The stock market took a shudder on the news.
There is a real risk of a credit and financial crunch. That is the danger that is flashing amber
right now. The UK will not be immune
from a similar credit crisis. Sub-prime
home loans are 8% of the UK mortgage market, worth around £30bn. According to the Financial Services
Authority, most of the eleven big banks lending money in this market paid no
attention to whether the borrowers could pay them back. Over half the borrowers self-certified their
incomes!
The credit-led boom in world stock markets and property
prices is now in jeopardy as central banks raise interest rates
everywhere. Only this month, the
European Central Bank, the Bank of England raised their rate. Central banks in Switzerland, Canada,
Australia, New Zealand, India and China have also.
The pain is being felt in homes across the UK, the US, and
much of the world.
***HOUSING UPDATE***
Mr Brown told BBC Radio 4’s Today programme he would
look at ideas to make home ownership easier, such as
20-year fixed-rate mortgages and more shared-equity schemes.
He added: "We’ve got to make houses more affordable."
Mr Brown said there was a need to "make the system of
house-buying more flexible" for first-time buyers and
people moving home.
More properties had to be built, particularly on
"brownfield land", he said, adding: "This is a new and
urgent challenge that we’ve got to meet by the public
and private sectors working better together."
Mr Brown’s spokesman denied claims that much of the
countryside would be lost after Communities Minister
Hazel Blears said house building took "priority" over
environmental concerns.
She told the local government select committee she
could not give "categoric assurances" about redrawing
the green belt.
The Conservatives said this had "raised the prospect
of the government systematically concreting over"
protected land.
They also suggested she had given "the green light to
green belt destruction on a massive scale".
Shadow planning minister Jacqui Lait said: "We need to
build more homes. But the government should work with
local communities – and must respect the wishes of
local people who want to protect their green belt for
current and future generations."
But Mr Brown’s spokesman said the government could
"give assurances" that all land currently classed as
green belt would remain so under new plans to increase
housing.
He said the prime minister was "not proposing any
changes to the robust terms" of the current green belt
land provision.
