The country is £1.2trillion in debt. The national debt has tripled in the last 10 years and the cost of interest to service this debt is the fourth largest cost to the country, behind education, welfare and health. The interest payments on the national debt cost each of the 30 million UK taxpayers more than £1,650 a year. Yet this Chancellor appears to have “spare money” to give to house builders? In a little under a year, according to figures from the Home Builders Federation (HBF), 55,000 reservations have been made using Help to Buy. Now the scheme has been extended to 2020, at the current rate around 385,000 new homes could be sold using the Help to Buy state-subsidy.
The Bank of England interest rate has been stuck at 0.5% for five years now – the lowest rate for 300 years. Who has this benefited? The winners are – anyone with a mortgage they shouldn’t really be able to afford, companies looking for cheap debt and the government, which has been able to add to the national debt aided by the very low rates. Oh and those that own shares, especially house builders shares.
The losers outnumber the winners. Anyone holding cash has lost considerably in real, after inflation terms. Campaign group ‘Save our Savers’ estimate that keeping rates artificially low has cost the nation’s savers a combined total of £326billion. Anyone looking to buy an annuity has also discovered the rates available are well down on five years ago. At least George Osborne, in yesterday’s Budget 2014, has freed those yet to take their private pension from the all but compulsory purchase of an annuity. But the small print has yet to be written on this so we will have to wait and see. In any case, what are the soon to be pension cash rich going to do with their money? ISA rates are at best a meagre 1.75%, and currently there is no benefit of transferring all or part of a shares ISA to a cash ISA unless you expect the market to crash.
Low interest rates have not helped first-time buyers either – they have been hurt by higher house prices. Many have discovered that house builders have been able to increase their prices by around 14% in the last 12 months, all but eating up the 20% Help to Buy equity share subsidy. If interest rates had been normal, then there would have been a market driven crash with prices falling to levels relative to incomes and affordability. The house price to income ratio is still well over six times earnings – extremely high by historic levels. That means the market is heading for a nasty correction but when?
Many of those buying anew home with Help to Buy are going to be in for a shock. Maybe not tomorrow, maybe not next month, but sometime. The Bank of England Governor Mark Carney is starting to give indications that interest rates will need to rise. Only last week he indicated that there is no intention of selling the government debt the BoE acquired during it’s £375billion quantitative easing programme (QE) back into the market. This could result in higher inflation. More critically for anyone buying a home at today’s inflated bubble prices, was his declaration that he expected interest rates to rise to 3% by 2017. Interest rates could even rise faster than this.
So a word of caution. With the current ultra-low mortgage interest rates, the percentage of take home pay needed to meet mortgage payments is now just below the long term average. So this means houses are affordable, but only at today’s artificially low interest rates. The moment interest rates begin to rise they will rise above this average causing house prices to crash. This will have dire consequences for everyone, especially those that have stretched their finances to buy a new home after being encouraged by Help to Buy. If interest rates rise to 3%, it would mean mortgage payments would rise to be well over 50% of take home pay. So how affordable is that new home, when interest rates have risen 500% in 30 months time?