There’s a certain type of ageing Tory commentator whose response to the ongoing surge in interest rates is to berate those who will soon be paying. They look back to the higher rates of the Nineties and effectively tell today’s petrified homeowners to suck it up – a view epitomised by former minister Edwina Currie, who tweeted about boomer resilience last week. This attitude, however, ignores both the scale of the problem and the electoral consequences it might have for the party.
First, it is a rose-tinted view of the crisis of the Nineties. Many were ruined when interest rates surged to the mid-teens. Housing repossessions skyrocketed, homeowners fell into negative equity, and those who couldn’t keep up with their mortgages suffered lifelong financial damage. It hit the government too, with the economic turmoil laying the ground for the Conservatives’ landslide defeat in 1997.
Moreover, today’s problems could be even worse, both for homeowners and the Tories. In relation to monthly costs, interest rates matter, but so too does the amount borrowed. That’s simple mathematics. The average house at the beginning of the Nineties crisis cost just above £50,000 and the average earner made around £17,000 – a ratio of about one to three. Now, the average house costs around nine times average earnings.
Homeowners today, therefore, begin the crisis already much closer to the edge of their capacity to pay. They have likely borrowed far more relative to their income because their house was significantly more expensive. They have far less slack to take up, and an interest rate of 6 or 7 per cent is now equivalent to the mid-teen rates of the Nineties. Unless there is some measure of forbearance by the banks or intervention by the state, hundreds of thousands of people will be in serious trouble.
Politically, this will be a disaster for the Conservative Party. Home ownership is one of the biggest markers of whether someone is likely to vote Tory or not (there are only three Conservative seats where home ownership is below 50 per cent). Surging house prices have already eroded the party’s support among even the relatively well-off young and urban who have been frozen out of home ownership, with vote share falling among the under-40s and in cities. Rising rates will now hurt them elsewhere.
An era of historically-low interest rates saved some, in the right circumstances, from the worst effects of the housing crisis. Those with solid incomes, especially in suburban areas away from the south-east, have been able to borrow their way to comfort. From the oft-derided “Deano” with his highly leveraged new-build and car on credit, to middle-aged professionals who have put housing ahead of savings and pensions, low-interest rates have been welcome, and they have thanked the government for them with their votes. Now, they are going to reap the crisis.
[See also: The housing crash will be different this time]
As rates surge upwards, those who have indulged in cheap credit will start to pay the price. In the worst cases, they will be unable to keep up with payments and face losing their homes. The more fortunate will just have their disposable income squeezed. Either way, the lifestyle that cheap credit sustained will disappear, and few forgive governments that make them feel poorer.
This will entrench the Conservatives’ electoral problems. The only people likely shielded from an interest rates crisis are those who already own homes mortgage-free – the rich and elderly, who are already safely in the blue corner. The sort of voters who change direction and who decide elections are going to hurt – and they will likely blame the government for it. It was what cost the Tories in 1997 and will probably strike them hard again now.
If the Tories start to lose homeowners, their future as a political entity is seriously imperiled. Buying a house allows people to build up capital. It helps tether them to the local area and sets them up for the stability of family life. Each of these is a cultural and economic push towards conservatism – but not one that is likely to withstand the shock of rising interest rates.
The government has little room for manoeuvre. It has few options for controlling inflation beyond raising interest rates, and really can only choose who the pain hits, rather than whether it hits at all. The burden falling on more affluent homeowners is morally preferable to letting inflation erode the standard of living of the poorest yet further. Any subsidy or relief for mortgage holders would only shift the problem on to those worse off.
It was little different in the late Eighties and Nineties. John Major famously said in his time: “If it isn’t hurting, it isn’t working.” This time around, however, the sheer scale of house prices means that it is going to hurt more, both for those with big mortgages and for the Conservative Party. Black Wednesday and its consequences put them out of power for a generation; losing mortgage holders now could extend their spell in the wilderness.
Part of the secret for the Tories over the past decade has been their ability to shield their supporters from the economic consequences of the 2008 crisis. Cheap money played a big part in this, but this has run out. Losing struggling homeowners could hasten the rout and make the comeback even harder. When ageing Tories invoke the memories of the past, they need to understand the differences and similarities between today and then.
Headline interest rates mean very different things when the amount borrowed is much higher, especially relative to income. But the political consequences could be the same: a Tory party that falls to historic unpopularity. Either the commentators could find some sympathy for today’s homeowners, or they might have to accept their party’s evisceration.
[See also: UK mortgage rates are a ticking time bomb]