Is our Prime Minister an economics illiterate or a scammer par excellence, given his recently reported remarks about it being ‘lovely’ for interest rates to remain low ‘forever’, apparently to help house buyers? Or is this too harsh a criticism? What about all the good honest hard working people who try to save and are being punished for their prudence; or pensioners, again with meagre savings and worse pensions as a result of artificially low interest rates?
It is easy to see how low interest rates benefit the PM’s privileged Chipping Camden set or Members of Parliament flipping expensive second homes or buy-to-let landlords, but the case for first time buyers is not that simple. There is wide variation in house prices across the country already. A fisherman trying to buy a modest home in a Cornish fishing village could be priced out of the market by holiday home purchasers made worse by low interest rates. In the South Wales Valleys and elsewhere the problem is more likely to be poor wages and employment prospects than high house prices. In London, or other large cities there is ‘gentrification’ making some areas unaffordable to existing residents.
As we know from elementary economics, over-demand and under-supply forces up prices, and so does availability of cheap credit and irresponsible lending, especially to sub-prime borrowers. Also, our construction methods are not particularly efficient or materials cheap given that bricks and mortar are energy-intensive to produce. Interestingly, if you plug some typical figures into a mortgage calculator for a repayment mortgage, low interest rates and large mortgages seem to lead to higher monthly repayments than higher interest rates and lower sums borrowed, pushing borrowers into interest only mortgages. (I used a 2:1 ratio between high and low over 25 years).
Then there is VAT on domestic home improvements, which is hardly a help for renovation works, especially for struggling first time buyers; VAT is a minefield of complexity and allowable rebates may be missed. So it is a much more complex subject requiring a more holistic and subtle approach than sound-bites. It might help if the ruling Establishment actually had some first-hand experience of struggling on an average income (or less) to buy or renovate a home.
The larger economy also gets distorted by extra low interest rates and excessive housing costs, usually for the worst. Asset prices generally rise, increasing the difficulty of acquiring them and tying up more money that could be used productively elsewhere. Marginal low profit businesses struggle on through borrowing too much also tying up money that could be used elsewhere. When interest rates are less than inflation, the purchasing power of savings is destroyed, encouraging immediate spending. This is destruction of property and assets, rather than fulfilling the rightful role of government to protect them.
The chief beneficiary of low interest rates is a spendthrift Government which can tax spending and conceal the discomfort of their debt mountain for longer, borrowing and wasting more, safe in the knowledge that the headline cost in interest doesn’t look so scary; until you start thinking about repaying the larger amount borrowed. Perhaps our PM should consider the advice of Mr Micawber in Charles Dickens’s David Copperfield, who said: “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six; result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six; result misery.”