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LONDON – Hundreds of thousands of Britons will face mortgage misery over the next 12 months. Rishi Sunak is about to feel their wrath.
The British prime minister has been deceived by Britain’s stubbornly high inflation rate, which at 8.7% remains the highest in Western Europe. As a result, the Bank of England is pushing interest rates higher and higher, creating a crisis for UK homeowners not seen in a generation.
About 800,000 families will have to mortgage their properties next year, the Resolution Foundation calculates the think tank, and rising interest rates mean they will be paying a staggering £2,900 a year on average from 2024. With a general election looming next year, times for Sunak couldn’t be worse .
This is a « huge problem » for voters, Andrea Leadsom, a Conservative member of the Commons Treasury Committee and a former UK business secretary, told POLITICO.
« It is clear that we will lose the next elections, » sighed another former minister. “These are the voters we need. We cannot intervene or the situation will get worse and the Bank of England has been too slow to act to avert it. The goose is cooked, but it was cooked a long time ago.
Yet both former ministers agreed with Sunak and his chancellor, Jeremy Hunt, that the UK government should not step in directly to support those struggling to pay, despite the knowledge that they could be beaten at the polls as a result.
Hunt told MPs this week that the mortgage relief programs would only « make inflation worse, not improve it ».
« Defeating inflation must be the priority, » Sunak said in a speech Thursday, timed shortly after the Bank is expected to announce its latest rate hike. « If we don’t get inflation under control now, the damage will be worse and more lasting. »
The one thing we didn’t want to happen
The impact of higher interest rates is particularly severe in Britain due to the large proportion of mortgages – 80% of existing deals and 90% of new ones – supported by short-term fixed rates.
Britain’s mortgage problems have been further exacerbated by government support packages introduced in recent years to prop up the housing market, such as former Chancellor George Osborne’s Help-to-Buy scheme and the era’s stamp duty vacancy. COVID by Sunak, which critics say have lured people into buying property with an illusion of convenience.
It’s hard to imagine any kind of blow to the nation’s personal finances presenting more than a nightmare for Sunak’s Conservative Party, as a mortgage crisis is hitting those it needs most to win over in 2024.
Younger voters – who overwhelmingly supported Labor in the recent election – tend to concentrate in the cities in rented accommodation, while the majority of older voters who own their homes outright without mortgages are already stranded Conservative voters .
« So there’s this group in the middle, which has borne the brunt of rising food prices, rising fuel prices, and now interest rates as well, » says Paula Surridge, a professor of political sociology at the University of California. University of Bristol. “They are the group that both sides should be targeting. This will definitely be a problem for the Conservatives. »
Adam Hawksbee, deputy director of the centre-right think tank Onward, characterizes this group as those who « bought their home with cheap finance, live in satellite towns or cities and have been accustomed to a good quality of life with a car and summer holidays – will be the hardest hit.
While the heaviest burden is expected to fall on London and the South East, according to the Institute for Tax StudiesSurridge notes that mortgage rates are a problem not limited to the wealthiest voters but widespread across the country.
A Conservative MP representing a relatively deprived constituency said: ‘There are poorer people in the seat who will struggle, but there are more support schemes for them and their overall spending may be less than half hard. they care more.
A chancellor at no. 10
The crisis will be felt strongly by Sunak, who launched and eventually won his candidacy to lead the country with the aim of stabilizing the economy.
His promise to halve inflation by the end of the year now looks like a tall order. But party watchers – and Downing Street allies – say his only hope is to stick to the path he has blazed.
“I feel a deep moral responsibility to make sure that the money you make keeps its value,” Sunak said on Thursday. “That’s why our number one priority is to halve inflation this year… dare we do it.
« There’s no one I’d rather have at number 10 right now, because it’s so economically dry, » says Onward’s Hawksbee. « The government must hold the line and resist pressure to intervene. »
Indeed, many Conservatives believe the UK has become overly dependent on the kind of large state interventions that have become common during the pandemic.
The irony is that it was Sunak himself – a politician who revels in his fiscally conservative credentials – who crafted the multibillion-dollar COVID assistance programs while serving as chancellor during the pandemic.
His famous March 2020 pledge – echoing European Central Bank President Mario Draghi – to do « whatever it takes » to protect UK households seems a long time ago.
« We can’t bail out everyone every time, » said a former Treasury secretary. « And in that case, it would only make things worse. »
So what can be done?
Sunak and Hunt’s only real action so far has been to summon the biggest mortgage lenders for a meeting this Friday, where they will be « reminded » of their obligations to borrowers.
Further direct action by the banks in the form of forbearance – agreeing to suspend or reduce mortgage payments – seems unlikely, as it would simply offset the Bank of England’s efforts to curb inflation. The bank is expected to raise its key rate to 4.75% on Thursday and could still surprise with an even higher move.
The opposition Labor Party released its own five-point plan on Wednesday evening, urging new requirements for creditors to show leniency for those struggling to pay. But UK Finance, the body representing UK mortgage lenders, says banks are already working with customers to find alternative solutions.
Mortgage lenders are also keen to point out that more radical measures, such as imposing mortgage holidays, would only kick the can down the road.
« They’re an option that still exists, but the interest keeps piling up, so you end up paying back more than you would have – a lot of people don’t realize that, » said an industry communications insider who was not authorized to speak publicly. .
« The best plan would be to ignore the squeal and point to declining inflation everywhere except in Britain, meaning that rate hikes here will still end shortly even with recent inflation data disappointments, » he told POLITICIAN Meyrick Chapman, principal of Hedge Analytics.
This was echoed by Société Générale global strategist Albert Edwards, who said: “Most economists would say it is utterly ridiculous to enhance the impact of rising interest rates on mortgage holders, as this would mean that interest rates interest should rise even more ».
However, the scale of the crisis is such that pressure on the government is now growing from within the Conservative Party.
A former minister who worked directly with Sunak said: « Call [for action] they are growing. It’s not a real mass campaign or rebellion, but there are a growing number of concerned MPs. I would have expected it to be much further forward given the previous record during COVID when it was very decisive. »
Former minister Jake Berry this week went public with a call for tax cuts on interest rates, as a way to defuse the ‘ticking time bomb’. Housing Secretary Michael Gove has urged the banking sector to consider introducing 25-year fixed-rate deals, putting the UK more in line with the long-term fixes offered to clients in the US and Canada .
But Treasury Secretary Andrew Griffith was quick to dismiss the former as unsustainable, while saying the latter would only be viable as a long-term project.
The structural factors are very different in the United States, where long-term mortgages are made possible in part by de facto mortgage underwriting by quasi-government agencies guaranteeing third-party loans. For the UK to normalize long-term mortgages, similar entities would likely have to be set up, with possible consequences for Britain’s credit profile, and therefore for the pound.
A government official familiar with Treasury thinking summed up: “No one is proposing a series of serious, short-term, alternative interventions that are significantly different. It depends on who people think is competent and will limit spending. »
Sunak’s concern is that, after Liz Truss, and with yet another crisis looming, the Conservatives’ legendary reputation for economic proficiency may now be destroyed.
As Surridge puts it: “People in the past have perhaps been able to say ‘we know the Conservatives are the bad party, but they’re in the economy.’ Without that, what’s left as a reason people choose conservatives?
Emilio Casalicchio, Geoffrey Smith, Joe Bambridge and Annabelle Dickson contributed to the reporting.