LONDON, ENGLAND – FEBRUARY 03: Governor of the Bank of England Andrew Bailey speaks during a press … [+]
The Bank of England’s (BoE) war on Britains stubborn inflation is likely to crush the country’s economy in ways that many people aren’t recognizing.
If that comes to fruition it won’t solely be the fault of the people at the BoE who decide the monetary policy. The problem comes down to decades of absurd housing policy, and the overly cautious banking industry. Here’s where we are now and how we got here.
Bank of England Pledges to Crush Inflation
Currently the BoE is consistently raising interest rates in an effort to stymie inflation which hit 8.7% in May, down from 11.1% last October, according to data collated by TradingEconomics.com.
To help bring inflation down further, probably around 2%, the BoE has increased its so-called base interest rates to 5% recently, up from less than 1% in late 2021.
Other central banks such as the U.S. Federal Reserve are doing a similar thing, but the consequences will likely be far worse in the United Kingdom than elsewhere.
It comes down to decades of economic mismanagement in the housing sector.
Almost All Home Loans Have Variable Rates
In the UK long-duration fixed rate mortgages don’t exist. There are no fixed rate 30 years loans or for 20 years like there are in the U.S. the best thing you’re likely to get is a fixed rate for five years followed by 20 years of rates that regularly adjust the interest costs up and down.
Put simply, sooner or later most mortgage borrowers end up with an adjustable rate mortgage int he UK. And right now those mortgage rates are continually jumping higher and higher in step with the BoE’s consistent rate hikes. Rents are also goign up in tandem as well as landlords attempt to cover their rising interest costs and maintenance bills.
Housing Costs Skyrocketing
In simple terms, the cost of housing is going up dramatically for much of the country, sometimes by thousands of pounds a year (thousands of dollars.) That means people will have decreasing amounts of money to spend on other non-housing goods and services. In turn that will weaken the economy.
However, its worth noting the thing that made this whole situation worse. Britain has long had a housing shortage. There are currently an estimated 29 million homes in the UK, based on government data collated from the different countries (England, Wales, Scotland and Northern Ireland.)
Who’s to Blame?
That sounds like a lot, but there’s still a shortage of around 4.3 million dwellings across the country, according to an analysis by the Centre for Cities. To reach that number the housing stock would need to increase by 15%, a staggering figure, by any standards.
That shortage has led to housing prices reaching the stratosphere. A decent two bedroom apartment in the nicer parts of central Edinburgh, Scotland’s capital city will now likely cost at least half a million pounds ($635,000,) probably more.
The situation is far worse in London and the south east of the UK.
It has also meant many people have been forced to take out huge mortgages which are now becoming unaffordable.
NIMBY Special
How did this housing shortage happen? Quite simply, many government organizations make it there goal to ensure that as few houses as possible get built in their area. Sure, these bureaucrats and politicians who make such decisions don’t like the idea of homelessness in their district, but they also don’t want to upset the voters who almost universally don’t want new dwellings near them.
This practice is called NIMBYism, or Not In My Back Yard. I know of at least one head of a housing charity went to great pains to make sure a new dwelling was not built near his home. The Guardian newspaper has called out the awful impact of NIMBYism. Quite simply if the NIMBYs didn’t exist there would be more home available and they’d be available at lower prices, which would likely mean smaller loans.
Separately, the following the financial crisis of 2007-2009 the UK banking sector was wary of making home loans. Not just a bit cautious but like they were dealing with live grenades.
Scant Little Loan Growth
For much of the decade after the crisis UK banks — the ones the UK tax payers bailed out to the tune of $800 billion — the amount of mortgage loans outstanding didn’t grow by more than 2% in the years from 2010 to 2015, according to an analysis of data from the Financial Conduct Authority. With that sort of support for housing no wonder there’s a housing shortage. Who would build lots of homes when the banks are not there to provide financing?
Putting all this together — too few homes caused by NIMBYism, lack of lending by major banks — super high prices of dwellings across the UK, now combined with high debt levels and interest rates that rise with banal regularity now causing financial pain to indebted home owners.
It’s a bad scene and its likely to worse.
