In the Sunday Telegraph, a few weeks back, the money saving expert’ Martin Lewis warned that “When people can’t afford food, they get angry – civil unrest isn’t far away”.
He was worrying that the current inflationary economy would lead there quite quickly. I’ve been thinking about this warning which – even a few weeks after it was made – now seems that much more likely.
Because I have noticed, over recent years, how difficult it is for people to get by when every aspect of their lives is squeezed. We are entering another period like this, or so it seems. There is no mainstream economy. No fair day’s work for a fair day’s pay. Everyone exists on the margins.
We have avoided becoming aware of this for years by having both partners go out to work or – as far as the middle classes are concerned – by realising we can no longer afford to send our children to independent school any more (which is why our greatest institutions now cater mainly to oligarchs and their kids).
We have also brought this partly on ourselves by squeezing a little extra from he sale of our homes.
There is little choice now – both partners in a relationship must work because their mortgage depends on joint salaries.
There is even an argument that the mass appearance of middle class women on the jobs market is one of the factors pushing up house prices over the last three decades. They earned money so bigger loans were available, so the house prices rose to meet them.
That is how it works. Inflation is too much money chasing too few goods, and what we have seen since the deregulation of the mortgage markets is ever more reasons to lend more, so that the house prices rise to take account of it, and so the cycle goes on – in retrospect a terrifying rack for the middle classes.
Especially if women didn’t want to work, because that freedom is now beyond them.
Once lenders had began to calculate the upper limit in multiples of joint salaries, there was another escalation of house prices. It is part of the far bigger vicious circle that is caused by people desperately stretching to afford the home they want, and which is rising out of sight beyond their pocket as they watch – a vicious spiral that keeps on spinning: smaller houses, bigger loans, more salaries, higher prices, smaller houses and so on.
One twist to this cycle we have so far managed to escape in the UK is so much lengthening the repayment terms, so we have not yet been given the pleasure of Japanese-style Grandparent Mortgages, which extend the mortgage period so that the next two generations had to pay it off. It was no coincidence that, after Grandparent Mortgages emerged in Japan, Tokyo property prices rose to be the most expensive in the world. The losers got to buy small tubes they could live in.
Even so, most mortgages now take 35 years to pay off, unlike the old 25-year ones, a phenomenon that has emerged since I last write about this in my book Broke.
Nor have we had subprime lending on quite the same scale as the USA, with loans packaged to their lower paid ‘middle classes’ in such a way that they could never be paid off. But we have some elements of that: interest-only mortgages – a hefty segment of the UK market – are also mortgages which will never be paid off without a change in financial circumstances. Given that the last few years have seen interest rates at a historic low, this is bound to mean trouble in the future when they rise again, as they almost certainly will.
The British version of the vicious spiral has been lending against ever greater multiples of salaries, which also feed into the cycle of higher prices. Until 1988, the limit was usually twice the salaries of the people buying. Loans of four times joint salaries were unheard of but, over the past decade, loans for four times joint salaries came to outnumber those of twice joint salaries.
Here is the strange reverse alchemy of the house price spiral. When Victorian economists calculated that the average English peasant in 1495 needed to work for fifteen weeks to earn the money they needed to survive for the year, supported as they were by access to the common land. In 1564, it was 40 weeks. Now, when GDP tells us we are incomparably richer, it is now extremely difficult to buy a house in southern England and live a reasonable life without both partners working flat out all year (more about this in my book Funny Money).
Even when both partners work, it is often simply not possible (certainly not for us twenty-first century peasants, of course).
This aspect of the spiral has had some peculiar effects. When the 2001 census unexpectedly revealed that half the UK population now lives within half an hour of where they were born – not exactly globalisation – it did cause some scratching of heads among policy-makers. The real reason was that only working couples can now afford to buy homes. That means they need to live near their parents or in-laws to provide childcare during the day. Those who can’t rely on parents for whatever reason are thrown on the mercies of an expensive, understaffed childcare sector that often eats away most of the second household salary.
The other aspect of the spiral which is very obvious in the UK is the phenomenon of the Incredible Shrinking Homes.
This isn’t rocket science. You only have to look at the generous gardens of the semi-detached houses of the 1930s to see that something is wrong, with space for hens and vegetable patches if need be, compared to the pinched and mean pocket handkerchiefs of turf and concrete in modern estates.
Yet despite these peculiar spirals, UK politicians don’t seem to grasp that – since Margaret Thatcher’s government abolished the so-called Corset in 1979, designed precisely to prevent this – this is exactly how house prices rise. They think it has something to do with not enough homes being built, as if you can ever satisfy the hoards of Far Eastern investors who descend on London seeking investments.
This is a tragedy, and so is the latest short-termist wheeze of the government to use Brexit to change the regulations for smaller banks so that mortgages can be cheaper.
Why don’t they understand that house prices will simply rise to meet them?