Originally posted on August 4 on Inside Edge 2, my blog for Inside Housing
Record low interest rates have been great for people with mortgages but terrible for the housing system as a whole.
Like the Bank of England’s decision in March 2009 to cut the base rate to 0.5%, Thursday’s further reduction to 0.25% is motivated by concern about the economy as a whole. But nobody imagined in 2009 that seven and a half years later interest rates would still be as low, still less even lower.
The result has been severe distortion in the housing market. What was only meant to be a temporary fix has instead become a semi-permanent feature of the system that has benefitted home owners and landlords at the expense of everyone else. The effect of Thursday’s small cut will be limited in itself but it means that effects of the low rate regime will be with us for much longer.
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.