The Resolution Foundation has today published a paper discussing the sorry state of the UK housing market and in particular the problems for vulnerable mortgage holders. They argue that the problems will get ever worse as interest rates are set to rise in the coming years eating away an ever increasing proportion of peoples incomes. They suggest that around 770,000 households will have to spend a third of disposable incomes on repayments by 2018, as interest rates rise to a predicted 3%. Coupled with this they are left with little flexibility and choice over their repayment plans. The article ends by suggesting that ‘easy credit’ that was available pre-crash is largely to blame.
The Guardian reports the following from Business Secretary Vince Cable who also highlights the seriousness of the situation:
“In the next few years we are going to get back to high levels of household debt in relation to income, significantly higher in the UK than in almost any other country. A lot of this is due to booming house prices. And that contains serious dangers, not least the fact the large numbers of people taking on mortgages at considerably more than three times their income are going to face higher interest rates when we return to normality…It is a real, real, real worry.”
Positive Money argues that the key driver of rising prices is the power of banks to create money. Excessive lending before the crisis caused billions of pounds of new money to be created. This money has flooded into the property market, pushing house prices out of reach. With more money going on the mortgage, we all end up with less money left each month to pay the bills and to spend in businesses and shops. It is the banks that really benefit from this situation, since higher prices and bigger mortgages lead to more interest payments and greater profits. With an effective license to print money, this guarantees that banks will continue to create and lend too much.
Our proposals provide a way to strip banks of their power to create money. Without this kind of change, we will just see the problems get worse and worse.
Watch this 2 min video: House prices: why are they so high?