In his first speech as Prime Minister outside 10 Downing Street yesterday (25 October), Rishi Sunak said of his predecessor that “mistakes were made”. This is a form of speech that the American political journalist Bill Schneider calls the “past exonerative”, and it’s often used by people trying to say that the smoking ruins they’re standing in front of was not their fault. Notable examples include Ronald Reagan (after his government secretly sold arms to Iran), George W Bush (after his soldiers tortured Iraqi prisoners) and Tony Blair (after he helped Bush invade Iraq).
And indeed, a look at the week’s market movements suggests the mere existence of Sunak’s premiership has had a positive effect: the yield on on ten-year government bonds (gilts) has fallen by more than 50 basis points since Friday. But hang on a minute – isn’t the name Rishi Sunak familiar? Didn’t he used to have some influence on the UK economy, right before it developed a nasty case of gilt panic?
Gilt yields – which are how much the government has to pay investors for the money it borrows – are important not only because they affect public spending, but because they are one of the key numbers used by mortgage providers to set interest rates. Perhaps the most significant person in the removal of Liz Truss was Rabia from Manchester, who told Question Time at the end of last month that her mortgage offers had risen from 4.5 per cent to 10.5 per cent. The “whoaaa” that followed was the sound of an audience foreseeing first-time buyers fleeing the market, owners forced to sell as their fixed rates ended, and collapsing house prices.
But while gilt markets have calmed since then, they haven’t calmed much: yields on ten-year gilts are still twice what they were in May. It looks as if a major correction will still happen, and one of the people most at fault is Rishi Sunak.
The first part of this is becoming a broad consensus. On Monday (24 October), the investment bank Morgan Stanley published an investor note that warned that 30-40 per cent of mortgage holders in the UK will struggle to meet their monthly payments at an interest rate upwards of 6 per cent. A week earlier, the Moneyfacts website reported that the average rate for a two-year fixed rate mortgage had reached 6.53 per cent.
Goldman Sachs predicts that 40 per cent of the UK’s mortgages will be repriced to a new fixed rate in the next 12 months. Someone who bought a house at the median price (£292,110) with the average two-year fixed rate in March 2021 (1.56 per cent) will pay an extra £5,920 per year if they remortgage to 6 per cent in March 2023.
Goldman puts the total cost of a rise to 6 per cent at £75bn in extra mortgage payments. That’s the nation’s homeowners, already mortgaged to the hilt, taking on a cost equivalent to the country’s education system.
And rates could easily be higher than 6 per cent by next spring, because while gilt markets might calm (or they might not, depending on the fiscal statement next week), it is all but certain that the Bank of England will raise interest rates again on 3 November, and again on 15 December, and again on 2 February. The Bank’s governor Andrew Bailey may become the scapegoat for a lot of angry homeowners, but he is caught between two possibilities: raise interest rates and make swathes of homes unaffordable, or keep them low and inflation will burn away people’s disposable income anyway.
The real blame should go to the people who inflated house prices so much in the first place, and in the short term that is the chancellor who suspended stamp duty in 2020, introduced a mortgage guarantee scheme in 2021, and helped Boris Johnson extend the most inflationary housing policy of all, Right to Buy, to a further 2.5 million housing association tenants this year. These measures encouraged large volumes of new buyers into a market already overheated by other inflationary measures such as Help to Buy equity loans and a planning system that puts the concerns of Tory voters over the need for increased supply.
As chancellor, Sunak did more than anyone to encourage people, especially younger first-time buyers, to take on large amounts of debt in the blithe assumption that it would remain cheap. At the time, the most affordable way to do this was through a two-year fixed rate, and now around 100,000 people per month are facing a repricing of that debt to double or triple its previous level. Young homeowners already spending half their disposable income on mortgage payments (a common situation in London) will begin selling, and the supply of new buyers will dry up.
The effect on prices will be significant. Pantheon Economics forecast a relatively sedate 8 per cent fall last week, while last month HSBC and Credit Suisse predicted prices in London would drop by 15 per cent. Oxford Economics has said that property in the UK is overvalued by a third, and (while it is not a prediction) the Bank of England’s most recent stress test includes a fall in house prices of 31 per cent.
There are measures Sunak can take to cushion the blow, such as mortgage interest relief, which would be in keeping with his policy of handing universal benefits (such as energy rebates) to people who don’t need them (such as the owners of second homes). The sensible thing would be to target help to the new buyers he duped into a needlessly overheated market. But he cannot change the fact that the housing bubble in the UK – like the housing bubbles in the US, Canada, China and many other countries – is bound to deflate. Mistakes have been made, and Rishi Sunak has been one of the people making them.
[See also: House prices are falling across the world]