Housing: Boom, Boom, Boom!
I am reminded of a Garland cartoon at the time when Anthony Barber was Chancellor of the Exchequer. It was in the form of a triptych.
- The first panel showed a cheery chancellor holding up his budget box with the caption “Boom”
- The second panel showed a cheery chancellor holding up his budget box with the caption “Boom”
- The third panel showed a dishevelled chancellor holding up a burst budget box with the caption “Boom!”
I fear the current housing boom could go the same way.
Mortgages are at their most affordable for 14 years after lenders slashed their rates, a report has found.
The study by the Halifax said payments accounted for 27% of average incomes in the second quarter of 2013 compared with a high of 48% in 2007.
The bank said lower mortgage rates and a fall in house prices were the main reasons behind the improved situation.
A government scheme called Funding for Lending also encouraged lenders to cut rates after it was launched a year ago.
BBC News Website 17 August 2013: Mortgages at ‘most affordable level’ for 14 years
So with record low base rates we have record low mortgage rates. What happens when base rates return to more “normal levels” – as they must within the average 25 year term of a mortgage?
At the moment (August 2013) base rate is 0.5% and the average mortgage rate is 2.5%. In 2007 base rate was 5.5% and the average mortgage rate was 7.5%.
Interest rates, from Bank of England data tabulated on HousePriceCrash
So when base rates were more “normal”, mortgage rates were 3 times higher than now. So if you are now spending 27% of your income on your mortgage, when rates return to more normal levels you will be spending 27 x 3 % = 81% of your income on your mortgage.
Is this sustainable? Is this “responsible lending”? Or is there another “banking scandal” being set up? If people were not expected to realise that stock market investments in endowment policies could go up as well as down, I don’t see why they should be able to do the simple sum 27 x 3 % = 81%.