How the mortgage rate rise disproportionately affects the young

With interest rates recently pushed to their highest level for well over a decade, Lukas Winterburn, IF volunteer, looks at the consequences through the lens of intergenerational housing justice, for mortgage payers and tenants.

Bad news on interest rates

Whilst homeownership levels have dipped from their peak in 2002 of 72% to plateauing to 65.2% now, outstanding mortgage debt has risen to £1,648 billion in the UK. 

The potent combination of a decade of stagnant wages decoupling from ever-rising asset prices has meant ever greater debt on the backs of households. Given that homeowners now have larger mortgages, mortgage payers in the UK are particularly vulnerable to rising interest rates. 

Markets factoring an interest rate of 5.5% is potentially ruinous for households across the country. According to Neal Hudson, a UK housing analyst, a 6% interest rate would see a similar real level of mortgage rates as there was during the crash of the 1990s, which ultimately saw many households fall into negative equity and a record 77,000 repossessions in 1992.

An intergenerational fairness problem

Who does this affect most then? A combined 5.2 million households are set to be affected by interest rates in one form or another in the next 15 months according to UK Finance, with either their fixed-rate mortgages ending or being on a variable rate. This is not felt equally. 

With over 60% of over-65s owning outright, they are as a generation relatively insulated. By contrast, just 1% of 25-34 year olds own outright, whilst the figure is at 3% of those aged between 35-44.

Those in that age bracket without mortgages and a vast majority of the rest of the population are facing further squeezed budgets. Effectively, early polls indicate this is the unravelling of a certain aspect of the Conservative voter coalition, for whom low interest rates and homeownership are crucial to their prospects.

Not just owners. Tenants too

Spare a thought for tenants also. Their relative powerlessness means they are at the mercy of buy-to-let landlords, who face a choice between selling and/or passing on increased mortgage costs by pushing up rents (given their fixed-term contract has ended). 

A Fairer Private Sector, a white paper published just before Michael Gove left his role at the Department for Levelling Up, Housing and Communities, accepted some of these dynamics. With his replacement Simon Clarke’s support for Truss in her ill-fated package of tax cuts for the rich, it is unclear whether these proposals would be enforced. 

On Tuesday last week, the government failed to confirm that the ban of Section 21 evictions would go ahead; a key pillar of the Fairer Private Sector white paper, with leaks to the Times intimating that the Truss had reversed. 

Whilst it was, albeit briefly, reassuring that Truss reiterated her commitment to follow the 2019 Conservative manifesto pledge of ending No Fault Evictions, the UK will soon have its third PM within as many months. At the moment, the priorities on housing for the next occupant of 10 Downing Street remain a mystery.

What goes up… ? 

But what if house prices start to come down? If as the logic follows, housing is a source of intergenerational contestation between those outright owners who want to keep house prices high and those celebrating a fall in prices as easing barriers to acquiring a house, then might this benefit younger generations in the long term? 

The claim does not stand up to scrutiny though. Firstly, with the housing market’s importance to UK finances, our exhausted growth model indicates that the government will do all it can to maintain high house prices. When house prices dipped in 2008, then-Chancellor, Alistair Darling, stepped in with £1bn to effectively prop up house prices to stop a widespread sell off from developers.

Not a great leveller 

Even if house prices fell, it would not act as the great leveller of access to wealth. Firstly, those most exposed – tending to be those who have bought most recently – would face down the most painful negative equity. Secondly, at a time of an unparalleled squeeze on wages, it is unlikely that the majority of young people will be able to afford a deposit, the largest hurdle that governments have aimed to circumvent. 

Falling house prices would primarily help those people who have savings already, allowing for a further potential concentration of housing wealth in the hands of older generations and the wealthiest in society. As with every major issue in the housing sector, the pain is felt along intergenerational lines. This is just the next unevenly felt crisis which highlights that age is increasingly one of the primary divides through which precarity and powerlessness are lived.

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Photo by Mj from Unsplash