The phrase ‘safe as houses’ may soon lose its meaning for many people across the Commonwealth. Disruption to stretched supply lines from the Covid-19 pandemic, compounded by the Ukraine war, has seen energy, food and other costs soar globally. As inflation has risen to double-digit levels, and remains stubbornly higher than expected, interest rates have jumped steeply, putting intense pressure on household budgets.
After reaching historic lows after the 2008 financial crash, many people regarded low interest rates as the new normal and borrowed heavily on exorbitantly expensive properties. But as central banks squeezed demand by hiking rates, the pain was felt by millions of overextended house-owners. The average mortgage rate reached 6.8% in 2022, more than doubling in a year, the International Monetary Fund (IMF) said.
The UK ‘bank rate’ hit a 15-year high, and is likely to pass 5% soon; Jamaica is at a 12-year-high of 7% (nearly trebling since 2022); New Zealand is at a 15-year high; while Canada’s is up to 4.75%, the highest point since 2001, when the World Trade Center still stood and the internet was in its infancy.
In the UK, where two-thirds of people are owner-occupiers, mortgage loans are worth £315bn ($400bn) – the same as in 2007, before the global financial crash. With most borrowing on short-term fixed-rate mortgages, many people find repayments can double from one month to the next. Meanwhile, renters feel the pinch as well, with annual costs rising 10.4%, so the average tenant now spends 28% of gross pay on rent; some landlords are evicting tenants to raise rents further.
Many young people are stretched to the limit. One woman told the Times: ‘We cannot afford anything other than our mortgage, food and petrol to get to work, or we sell the house … It’s depressing. We are professionals in our mid-30s who work full-time and just want to live somewhere we can settle down and have a family but that is our future now.’ Nevertheless, the prime minister, Rishi Sunak, has ruled out any government help for more than two million homeowners facing a huge rise in mortgage costs as fixed-rate deals expire. Meanwhile, the Joseph Rowntree Foundation warned this week that 5.5 million UK households on low incomes have had to cut down on or miss meals because they cannot afford food. In its latest living standards survey, four million people reported going hungry, 4.5 million were in arrears, and 2.6 million in debt to loan sharks or pawnshops.
Strains within the system: Appearances and realities in British politics today – 1977
United kingdom The government and inflation – 1956
Australia The progress of inflation – 1951
The IMF has warned that ‘falling home prices could strain financial markets’ as rates rise, naming Canada and Australia as the two countries most at risk. The former was vulnerable because of the high number of mortgaged households and cumulative rate changes, it said; the latter was particularly exposed because of debt relative to disposable income. Both countries have seen large jumps in house prices.
In Canada, where some people dealt with rate hikes by extending their loans’ terms, the financial regulator urged banks to tackle the growing risks from such extensions at the ‘earliest opportunity’. Lenders are setting aside more funds to cover bad loans, fearing a surge in defaults. In Australia, about 880,000 borrowers are approaching the ‘mortgage cliff’ of fixed loans ending this year, with 450,000 more expiring in 2024. After the Reserve Bank raised the ‘cash rate’ 12 times in barely a year – with this month’s rise taking it to 4.1%, an 11-year high – many will see mortgage repayments triple to 6%.
In New Zealand, where house prices leapt 50% during the pandemic, high interest rates have since led to the property market plunging 17.5%, wiping NZ$176bn (£86bn) off household wealth over the year to December 2022. The country also has some of the world’s most expensive homes on average, ranking sixth globally.
Sub-Saharan Africa also faces financial headwinds; double-digit interest rates for housing are common, with an average bank rate of 14.5% in 2021, according to S&P Global. Lower affordability for borrowers, plus less liquidity for African banks, has limited home loans in most countries. Inflation, however, has proved as ‘sticky’ there as in the west. The Bank of Ghana raised its main rate to 29.5%, for example, to quell 42% inflation (from 54% in December). It is also forcing commercial banks to build up reserves amid the ‘worst economic crisis in a generation’ and seeking a $3bn IMF loan.
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This is all wearingly familiar to many people, not least in Britain, where successive Conservative governments under Margaret Thatcher used high interest rates as a key part of monetary policy – rates were raised to 17% in the late 1970s and nearly as high in the late 1980s and early 1990s. The roots of the current crisis in Britain stem from that era, but the same problem can be seen in many other countries: demand grows, but supply remains restricted as too little affordable social housing is built; a property bubble expands, as too many people chase too few properties; then it bursts, prices adjust, and the cycle begins again.
That process is happening again – with the same easy access to mortgages that fuels such booms and the same desperation among a new generation of first-time buyers, who are prepared to take on huge loans to purchase a home and hope for the best. We need to improve accommodation for tenants, controlling rents and providing long-term security, as happens across much of continental Europe. And as hybrid working is here to stay, most city centres have a lot of empty offices that could be converted into homes. There are better ways of housing one’s population – it doesn’t need to be this fraught.
Oren Gruenbaum is a member of the Round Table editorial board.