‘The Iceberg Heading Straight Towards the Government is Housing Market Crash’
Experts explain how ‘the wheels could come off’ the British economy as a result of Liz Truss and Kwasi Kwarteng’s reckless approach, reports Sam Bright
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UK markets have lost $500 billion in combined value since Liz Truss became Prime Minister three weeks ago, Bloomberg reported yesterday.
Thanks to the collapse of the pound, which has gone from $1.17 to $1.07 in the space of the last month, this financial hit is roughly equivalent to £350 million lost every 21 minutes from UK markets.
In other words, if we suspend reality and believe the Vote Leave claim that we ‘sent’ £350 million a week to the EU, the recent collapse in UK markets is approximate to 143 of these weekly payments. Nearly three years of alleged membership fees, burned in less than a month.
The Bank of England has now warned that there is potentially a “material risk to UK financial stability” and has adopted measures it hopes will help stabilise the economy.
This comes after the financial markets bet against the UK economy, following Chancellor Kwasi Kwarteng’s mini budget last week. Kwarteng announced a range of un-costed (i.e. he didn’t explain exactly how he would pay for them) policies to benefit the rich – including lowering the top rate of tax, removing the cap on bankers’ bonuses, cancelling corporation tax and National Insurance rises, and cutting stamp duty.
As the International Monetary Fund (IMF) has said, “given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy”.
Ergo, in order to curb inflation – expected to peak at 11% in October – the Bank of England will be forced to elevate interest rates. The more that Government measures push up inflation, by increasing the heat in the economy (through the “untargeted fiscal packages” described by the IMF), the more that interest rates will rise.
This, it seems, could be the apex of a new, profound economic crisis in the UK.
“The iceberg that is heading straight towards [the Government] is the housing market,” Dr Jo Michell, Associate Professor of Economics at the University of the West of England, told the Byline Times Podcast.
The Government’s policies “will induce higher interest rates,” he says. “The Bank of England will intervene, interest rates will be high… that’s going to feed through into mortgage rates, and I do struggle to see how the housing market doesn’t [crash].”
The importance of property to the UK economy has intensified since the 1980s and Margaret Thatcher’s economic reforms. “Let me give you my vision: a man’s right to work as he will, to spend what he earns, to own property, to have the state as servant and not as master – these are the British inheritance,” she said at her first party conference speech in 1975.
The steady, consistent growth of the private property market – underpinned by the conscious erosion of social housing stock – has formed the basis of individual security and investment in Britain ever since.
The average selling price of a home in the UK trebled during the Thatcher era from £19,925 in 1979 to £59,785 in 1990. This figure hit £251,634 in 2010, and now stands at £286,000. In London, that figure is £543,517.
“So much of the economy, for better or for worse – mainly for worse – is driven by housing price valuations,” says Dr Mitchell, “and this is where I think the wheels can really come off [the Government’s] so-called plan.”
This is reiterated by Professor Mark Stephens, Chair of Land, Property and Urban Studies at Glasgow University, who says that, “while the budget has triggered the crisis, it is the price for a decade of making every effort to support entry into home ownership while keeping house prices high”.
Indeed, we have already seen some evidence of this in just the last week. A number of lenders, including Halifax – Britain’s largest mortgage lender – have withdrawn some of their products until they figure out what interest rate to charge.
By 2023, monthly mortgage repayments as a percentage of household nominal disposable income is expected to hit 30% – the figure last seen immediately before the 2008 financial crash, which was spurred by unsustainable levels of property debt.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says that if interest rates rise as predicted, the average household refinancing a two-year fixed rate mortgage in the first half of next year would see monthly payments jump to £1,490 from £863. “Many simply won’t be able to afford this,” he said.
This is particularly a problem in the context of the UK’s current household debt burden. Although household debt peaked in the second quarter of 2008 at 151.5% of household disposable income, it has not fallen markedly since the crash, still standing at 131.3% during the first three months of 2022.
Moreover, in the midst of an escalating cost of living crisis, arrears on personal debt have almost doubled from £1.8 billion in October last year to £3.8 billion this year. The average credit card debt per household in June 2022 was £2,229.
From a political standpoint, it is notable – and to some extent shocking – that the Conservative Party is pursuing these policies; battling against hedge funds and risking a housing market crash.
The party received £11 million from hedge funds and finance tycoons between December 2019 and September 2021, while 20% of Conservative donations come from property tycoons – equivalent to £60 million over a 10-year period. Truss herself received tens of thousands of pounds in donations from property developers during her Conservative leadership bid.
Boris Johnson’s infamous mantra – “f*ck business” – seems still to be a guiding ethos in the Truss era.
Additional reporting by Sascha Lavin and Iain Overton
This article was produced by the Byline Intelligence Team – a collaborative investigative project formed by Byline Times with The Citizens. If you would like to find out more about the Intelligence Team and how to fund its work, click on the button below.