Five years onPosted: March 5, 2014 Filed under: Buy to let, Housing benefit, Housing market, Private renting | Tags: Interest rates, QE Leave a comment
On today’s fifth anniversary of record low interest rates all the talk is about how savers have lost out to borrowers. It should also be about renters and owners.
On 5 March, 2009 the Bank of England cut its main interest rate to 0.5 per cent, the lowest in history, and began its associated policy of quantitative easing in a successful attempt to prevent economic collapse.
But the effects continue to be controversial. The campaign group Save Our Savers estimates that savers have lost £117 billion in lost interest over the last five years plus another £209 billion from the way inflation has reduced the spending power of their money.
In contrast, borrowers have gained billions from lower interest rates. SOS’s message resonates because of the perceived unfairness that prudent savers and are paying to extricate us from a crisis caused by excess borrowing.
But what about the housing impact? In a CIH policy essay a few months ago, I did a rough calculation that mortgage borrowers have saved around £30 billion a year as a result of lower mortgage rates, QE and politcies such as Funding for Lending. Those with larger mortgages and with enough equity to remortgage to lower rates will have gained proportionately the most. The impact has also varied considerably between different regions.
Buy to let landlords, who in 2008 seemed set to become prominent victims of the credit crunch, have gained too. Fergus and Judith Wilson, for example, have gone from fearing they would go bust to expanding their property empire over the last five years. This is the reality of the housing market in 2014.
Falling interest rates have also meant fewer repossessions. At one stage the Council of Mortgage Lenders (CML) was forecasting 75,000 families would lose their home in 2009, as many as in the early 1990s crash. As lower rates reduced repayments, repossessions instead peaked at 50,000 and fell to 29,000 last year.
That is still very bad news for the people who did lose their homes and some borrowers remain trapped on high rates and unable to remortgage. However, it’s good news for owners as a whole and fewer repossessions and forced sales also reduced the downwards pressure on house prices.
In nominal terms, according to the Nationwide, the average UK house price fell 18.6 per cent from a peak of £184,131 in 2007 Q3 to a low if £149,709 in the 2009 Q1. They have since recovered to £174,444, just £9,687 or 5.3 per cent.
In real terms (adjusting for RPI inflation), house prices had fallen 25.8 per cent from their peak by the beginning of 2013 but last year’s recovery means they are now 22.3 per cent below their peak level.
However, compare that with what happened in the early 1990s. Prices fell further in both nominal terms (20.2 per cent) and real terms (37.4 per cent) and they also took 13 years to recover their value in real terms.
Of course they were different times and the crashes had different causes but it’s hard not to conclude that record low interest rates put a floor under property prices, benefitting anyone already on the housing ladder at the expense of people who are not.
That view is backed by a study of the distributional effects of low rates and QE by the consultancy McKinsey Global Institute. It concludes:
‘At the end of 2012, house prices may have been as much as 15 percent higher in the United States and the United Kingdom than they otherwise would have been without ultra-low interest rates, as these rates reduce the cost of borrowing. We based this estimate on academic research using historical data that suggest how housing prices rise as interest rates decline. In the United Kingdom, it is plausible that this relationship holds today.’
What’s good news for most people who already own a home is of course bad news for anyone who wants to buy because they will be paying more than they would have been. True, their mortgage rate will be lower too but first-time buyers with lower deposits typically pay a much higher rate than an existing owner with substantial equity.
And that’s only for people who could get a mortgage; many others have been locked out of the market by the more cautious lending criteria adopted by the banks. These are the priced out households who partly account for the astonishing growth of the private rented sector that I highlighted in my blog last week. Since the credit crunch, the number buying with a mortgage has fallen by just over 1 million while the number renting from a private landlord has risen by almost 1.3 million
These trends began long before low interest rates but that they have accelerated over the last five years, leaving priced out renters paying the mortgage of their buy to let landlord while house prices begin to rise again (9.4 per cent in the last year, according to the Nationwide, compared to 0.0 per cent a year ago).
The combination of low interest rates and QE plus the recession have changed the landscape in other ways too. The ‘real terms’ comparison I quoted earlier is a convenient way of discounting for inflation but it is fairly meaningless in a period when earnings have been falling in real terms. That means housing is become more expensive in relation to earnings now where the opposite was happening in the 1990s.
It’s much harder to work out what’s happened to rents since 2009 because there is so much variation between the different indices. LSL’s buy to let index suggests that the average rent in England and Wales is 13 per cent higher than in 2010. However, the experimental index produced by the ONSsuggests that rents in England are about 3 per cent higher now than five years ago.
Whatever the size of the increase, it came during a period when house prices and mortgage rates were both falling. This suggests a direct redistribution from tenants to landlords.
The impact has fallen most heavily on tenants who rely on housing benefit to pay all or part of their rent. Cuts and welfare reforms imposed since 2010 mean that they have either had to stay put and make up a shortfall between their rent and their housing benefit or move to cheaper accommodation. Amelia Gentleman has a story in The Guardian this morning graphically illustrating this point.
And the justification offered by ministers for the cuts and austerity that are set to continue for the rest of this decade brings this whole debate full circle.
George Osborne told the 2013 Conservative conference:
‘This battle to turn Britain around – it is not even close to being over. We are going to finish what we have started. What I offer is a serious plan for a grown-up country. An economic plan for hardworking people that will create jobs, keep mortgage rates low.’
Low interest rates and QE have redistributed money from renters and people on benefit to owners and landlords. And now, as I’ve blogged before, renters are paying to keep mortgages low.
Originally published as a blog for Inside Housing