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Tuesday, June 20, 2023

Unarguably Broken: Mortgage Misery Set To Increase.

 

The market is ‘arguably broken.’ It’s capitalism which is unarguably broken,

The economic and social misery that increased mortgage rates impose on first time house buyers, those who have still to pay off their mortgages, and private renting tenants (when landlord mortgage repayments exceed rental income). An important question that arises from the continuing damage that capitalism imposes upon the vast majority is why does the majority continue to allow this social system, - which has long outlived its historical usefulness as the necessary epoch which precedes socialism – to continue to exist when the obvious solution is ready and waiting?

The extracts below demonstrate the historical fallacy that higher interest rates reduce inflation:

“When this and other anti-inflationary tactics didn’t work, the eventual method settled upon by Thatcher and her Chancellor Nigel Lawson was to use interest rates as a policy instrument. In her memoirs, Thatcher stated that in her view ‘the only effective way to control inflation is by using interest rates to control the money supply

It is notable that interest rates have been used as the main policy instrument for controlling inflation ever since, by the governments of Major, Blair and now Brown. This is despite the fact that as a policy it not only arose by default, but has little to practically recommend it. The theory is that when interest rates rise, people borrow less and cut their spending. But this only takes into account one aspect of what happens. Interest rates are the price of borrowing and lending money and when interest rates rise, lenders are affected just as positively as borrowers are affected negatively. A movement in interest rates changes the terms of the relationship between borrowers and lenders in an economy and can create a short term economic disturbance, but it does not affect the level of purchasing power as a whole and can have no significant and persistent effect on the price level (for example, while those with mortgages and other loans are disadvantaged by higher interest rates, those with savings, interest-bearing investments, etc gain to a similar overall extent).

That raising interest rates cannot halt inflation – or even slow its rate of growth – has been demonstrated by a close look at economic history. During the time when Thatcher was Prime Minister the Minimum Lending Rate (as it was then called) for the banks rose from 9 per cent in 1988 to 15 per cent in 1989 yet the Retail Price Index (RPI) increased considerably across the entire period, having an average annual rate of 4.1 per cent in 1987 that had become 9.5 per cent by 1990.”

That raising interest rates cannot halt inflation – or even slow its rate of growth – has been demonstrated by a close look at economic history. During the time when Thatcher was Prime Minister the Minimum Lending Rate (as it was then called) for the banks rose from 9 per cent in 1988 to 15 per cent in 1989 yet the Retail Price Index (RPI) increased considerably across the entire period, having an average annual rate of 4.1 per cent in 1987 that had become 9.5 per cent by 1990.”

Dave Perrin. Crisis and Inflation: Back to the Future. 

Socialist Standard November 2008.

“The latest mortgage data from Moneyfacts reveals average interest rates hitting the 6% figure.

For residential mortgages, the average two-year fixed rate increased from 5.98% on Friday to 6.01% today, while the average five-year fixed rate increased from 5.62% to 5.67%.

The product count fell from 4,923 on June 16 to 4,683 June 19.

For buy-to-let mortgages, the product count fell from 2,589 on Friday to 2,515 June 19.

The average two-year fixed rate increased from 6.21% on Friday to 6.30% today, while the average five-year fixed rate increased from 6.17% to 6.23%”.

https://www.mortgagestrategy.co.uk/news/average-resi-two-year-fix-hits-6-moneyfacts/

‘In May, the Bank of England said 1.3 million fixed-rate mortgages were set to mature before the end of 2023, with a larger number up for renewal in 2024.

“The market is dysfunctional and arguably broken,”Martin Stewart, director of mortgage advisory London Money, told CNBC. “We have seen evidence where advisers are in queues alongside 2,000 others all trying to secure something that might not actually exist by the time they get to the front of the queue.”

The industry expert added that the last nine months have been “seismic” for the mortgage and housing sector, “on a par with the financial crisis,” although with different causes.

More than a quarter of UK homeowners on a fixed-rate mortgage are now projected to head for sharp increase in monthly payments, once their current deals expire.

Mortgage costs in Britain have been growing sharply in recent days, ahead of an expected interest rate hike by the Bank of England later this week. The regulator is likely to raise borrowing costs for a 13th consecutive time on June 22, in an effort to tame raging inflation’.

More than a quarter of UK homeowners on a fixed-rate mortgage are now projected to head for sharp increase in monthly payments, once their current deals expire.’




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