http://www.socialist.net/uk-interest-rates-the-chickens-are-coming-home.htm

UK interest rates: the chickens are coming home    Print    E-mail 
   By Michael Roberts     
   Thursday, 12 July 2007 
   Location, location, location! Grand design! Home in the sun. Yes, those
house and home TV programmes are still going, but maybe not for much
longer. 
bank_of_england.jpg Last week, the Bank of England hiked its interest rates,
yet again, to 5.75%.This was the fifth rise since August 2005. And the head
of the bank, Mervyn King, said that "further action" on interest rates
could be necessary. Most observers reckon the interest rate that most
borrowing and mortgages are based on - the bank rate - will go to 6% or
more by the end of this year. 
 Already, the recent hikes have meant that the cost of typical $B!r(B125,000
mortgage is now costing $B!r(B130 a month more than this time last year. As much
as 44% of the income of the average household is now being swallowed up by
mortgage costs. Many households have fixed-rate mortgages that are
unaffected by the bank rate moves. But 2.8m families will see a sudden jump
in costs when their fixed rate schemes come to an end over the next year. 
 The bean counters (accountants) Price Waterhouse Coopers calculate that the
burden of debt for the average UK household has now reached 19% of
disposable income, a record level, passing the peak reached in the high
interest year of 1990. Indeed, average household income rose 5.2% from 2004
to 2006. But after paying for higher interest-rate costs, the rise in
income was just 3%. After taking off the rise in prices over that period,
it means that most British households have not improved their standard of
living since 2004 because of the rise in housing costs. 
 We know that British families have accumulated $B!r(B1trn in debt at the last
count. Of course, they have the value of their homes to put against that.
But as the cost of servicing their mortgages rockets, the burden of
financing this huge debt will rise even further.interest-rates.jpg 
 The Citizens Advice Bureau, a body that must deal with the problems when
people get into too much debt, announced that 2007 could go down as the
worst ever for Britain's debt crisis. Personal insolvencies will reach a
record surpassing last year's record of 107,288 bankruptcies. The Bank of
England is hiking interest rates because it is worried that the property
market is getting out of hand again. In the leafy streets of Chelsea and
Kensington where the super-rich Russian and Arab $(D??(Bmigr$(D??(Bs buy their property
with wads of cash, prices have rocketed 30-50% in a year. But in the rest
of the normal world, prices are not really moving up that much. They are
already at levels that make it impossible for most young people to get on
the ?housing ladder'. And now with the cost of mortgages rocketing, all
hopes are gone. 
 The real problem is not just the very rich driving up house prices with
their tax-avoiding bonuses and illegal funds (that Gordon Brown's treasury
did nothing about). It is not just excessive demand for property but the
lack of supply. Back in the 1950s and 1960s, people on a working wage could
expect to get a decent home through the council. It may not be much but at
least it was adequate and at an affordable rent. But now in 2007, that is
cloud cuckoo land. It is a sorry state to say that in the 21st century in
Britain, young people are forced to stay with their parents or in-laws up
to their mid-30s before they can get a flat at some extortionate price or
rent. 
  The reason is yet another part of the destruction of the public sector and
the welfare state that successive governments, both Tory and New Labour
achieved in the 1970s and 1980s. 
  House building peaked in 1968 under the Wilson government when 426,000
homes were built, of which local councils built 46%. Council house building
declined under the Callaghan Labour government, but of course it was really
killed off under Thatcher. Building stopped and the existing stock was sold
off at knockdown prices. 
building-worker.jpg Council building is now virtually zero. It was supposed
to be replaced by ?social housing' with building by housing associations.
But housing associations build only 20,000 a year, the same rate back in
the 1960s - and indeed half the rate of the 1990s. 
 New home building is now totally dependent on private sector building for
profit. And this they have failed to do.Last year, they built about 180,000
new homes (mostly flats not houses), still 20% below what they managed 40
years ago! And of course, these are for phenomenal prices, out of the reach
of 35% of people not on the housing ladder. 
 The destruction of the public sector housing programme by the Tories and
New Labour together helped create the housing crisis for majority. The
population is bigger now than 40 years ago and yet house building now is
just 40% of that achieved in 1968. Moreover, back then nearly half was for
low rent accommodation that the poorest could afford. Now over 90% of new
homes are at astronomical market rates and low-rent new homes are almost
non-existent. 
 New Labour under John Prescott talked Blairily (lyingly) of building more
homes. But these were to be mainly in the south-east where everybody is
already suffering from overcrowding, noise and traffic. The regeneration of
more lowly populated areas was ruled out because there are no jobs there.
Why were there no jobs? It's because British capitalism is now so lopsided
towards finance over industry that incomes, jobs housing and the
environment are bent towards the south-east. 
brown_budget.jpg Our new New Labour prime minister, Gordon Brown, has
claimed that he is a builder. Yet it was as chancellor that he presided
over the worst slowdown in home building the country has ever seen. The
Treasury so ruthlessly throttled the flow of funds to councils and housing
associations that we now need 23,000 new homes year just to keep up with
the demand for low-rent accommodation and we aren't getting them. In 2001,
Labour presided over the lowest building rate for new homes since 1945. The
2012 London Olympics is supposed to revive a corner of East London with
40,000 new homes. That target has now been cut to 9,000. 
 Higher interest rates means suffering for many families in debt payments.
But there could even be worse, if it causes house prices to fall as in the
US. Then there is a double whammy, higher mortgage costs and falling house
prices. 
 In the US, house prices have been falling for the first time since the
Great Depression. As a result, many borrowers who either engaged in
speculating on buy-to-let house purchases or were just lower-paid
first-time buyers have been increasingly unable to pay and are selling up
at prices below what they paid for. As a result, they are defaulting on
their mortgages. 
 US banks have been lending to these people without even checking on whether
they can pay their loans back because they expected rising house prices to
cover any problems. People borrowed by just ?certifying' themselves on
their level of income and this was not checked. 
 Loans or mortgages in this ?sub-prime' market were huge during 2005 and
2006 in the US (25% of all mortgages). Now the default rate on these loans
has reached 14% and set tot rise to 20% - one in five of these borrowers
are going bust. 
 And even more serious crisis beginning to come out of the bushes. The US
financial sector has been doing big business laying off these loans to
others in batches of debt called collateralised debt obligations (CDOs).
CDOs were good business because they incorporate huge fees and they were
supposedly backed up by the rising value of property. But now all is
turning sour and banks, hedge funds and other mortgage lenders who bought
CDOs are getting into trouble. The big investment bank Bear Sterns had to
announce the closure of its CDO hedge fund with billions lost. The stock
market took a shudder on the news. 
 There is a real risk of a credit and financial crunch. That is the danger
that is flashing amber right now. The UK will not be immune from a similar
credit crisis. Sub-prime home loans are 8% of the UK mortgage market, worth
around $B!r(B30bn. According to the Financial Services Authority, most of the
eleven big banks lending money in this market paid no attention to whether
the borrowers could pay them back. Over half the borrowers self-certified
their incomes! 
 The credit-led boom in world stock markets and property prices is now in
jeopardy as central banks raise interest rates everywhere. Only this month,
the European Central Bank, the Bank of England raised their rate. Central
banks in Switzerland, Canada, Australia, New Zealand, India and China have
also. 
housing-for-sale.jpg The pain is being felt in homes across the UK, the US,
and much of the world. 
   
   
***HOUSING UPDATE***  
 
 Mr Brown told BBC Radio 4's Today programme he would look at ideas to make
home ownership easier, such as 20-year fixed-rate mortgages and more
shared-equity schemes.  
 He added: "We've got to make houses more affordable."    
 Mr Brown said there was a need to "make the system of house-buying more
flexible" for first-time buyers and people moving home.  
 More properties had to be built, particularly on "brownfield land", he
said, adding: "This is a new and urgent challenge that we've got to meet by
the public and private sectors working better together."  
 Mr Brown's spokesman denied claims that much of the countryside would be
lost after Communities Minister Hazel Blears said house building
took "priority" over environmental concerns.  
 She told the local government select committee she could not
give "categoric assurances" about redrawing the green belt.  
 The Conservatives said this had "raised the prospect of the government
systematically concreting over" protected land.  
 They also suggested she had given "the green light to green belt
destruction on a massive scale".  
 Shadow planning minister Jacqui Lait said: "We need to build more homes.
But the government should work with local communities - and must respect
the wishes of local people who want to protect their green belt for current
and future generations."  
 But Mr Brown's spokesman said the government could "give assurances" that
all land currently classed as green belt would remain so under new plans to
increase housing.  
 He said the prime minister was "not proposing any changes to the robust
terms" of the current green belt land provision.