Daily Archives: November 21, 2010

The rich have never had it so good

Nutory Boy’s absurdly titled “enterprise czar”, Lord Young of Graffham, managed to put not one but two feet inextricably in the political mire with his “people have never had it so good”  fantasy vouchsafed to a Telegraph journalist to the sounds of cutlery clacking and glasses clinking in what was doubtless a very decent Westminster watering hole.

Young based his extraordinary claim on the idea that those with mortgages were enjoying a bonanza because of  exceptionally low interest rates. The first hole in his proposition is that one third of British residents live in rented accommodation  (67.9pc of all households, down from 70.9pc in 2003 either own a house outright or have a mortgage –  http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/7299866/Rental-figures-soar-as-home-owners-decrease.html) .That means around 7 million households have not benefitted from low mortgage re-payments.

The second hole is that  of the 14.6 million owner-occupiers a majority will either own their property outright or have modest mortgages and, consequently,  will  have gained little  from low mortgage repayments http://england.shelter.org.uk/housing_issues/Home_ownership_issues).

The third hole is the fact that only those with tracker mortgages – a minority of a minority – will have madereally substantial  gains.

The fourth hole comes from the decline in property values since 2007, falls  which have probably wiped out even the gains made by those with large tracker mortgages.  

The fifth hole appears because by keeping interest rates down and printing £180 billion of money through quantitative easing  the government has ensured that inflation has remained high.  This means the savings made on reduced mortgage repayments have rapidly lost their value and the drop in house values is even worse than the face value figure shows.  (If a house was worth £200,000 in 2007 and is now valued at £160,000 but inflation since 2007 has reduced the value of the pound by 10% then that 10% has to be taken of the new face valuation. Inflation eats away at the mortgage repayment cost, but the gain in present circumstances is  much less than the loss from  asset depreciation ).

Buying a property has become impossible for  the vast majority of first time buyers as the supply of mortgages has shrunk and  no deposit mortgages have been replaced by demands for deposits of 15-25%.   For those who have not been able to get on the property ladder the position is increasing bleak as the pressure on rented accommodation becomes ever greater as more and more require it.  Social housing cannot be got for love nor money in most parts of the country and private rental property is expensive and getting more so. (A report on 17 November 2011 found that renting a property was more expensive than  paying the average mortgage in 80% of British towns. http://www.telegraph.co.uk/finance/personalfinance/8140384/Renting-a-home-is-more-expensive-than-buying-one.html).

The dirty secret of the housing  slump is that those in rented accommodation who have been forced by the government to subsidize those with property. By keeping interest rates low and introducing measures designed to encourage mortgage providers not to re-possess at the first opportunity,  owner-occupiers, although they have seen the value of their properties fall, have been protected from much greater falls in property values (the Republic of Ireland has seen property prices halve) and many have retained their properties incircumstancs which would have  seen them repossessed in earlier times. Not only that, had interest rates been set at a level to keep inflation under control, very large numbers of property owners would have lost their homes because an increase of a few per cent  in their  mortage rate would have pushed them over the financial cliff. That of course would have depressed property values much further as large numbers of properties came onto the market.

On the income side, unemployment has soared to around 2,500,000 officially (and is probably much higher) and will probably rise substantially when the 100,000 public sector jobs go. Those in employment have suffered short time working and wage freezes which mean in effect significant  wage reductions as inflation continues.  (The number of part-time workers  has risen to record numbers and the headline employment figures are fudged because they do not distinguish between full and part time workers). At the same time the government has changed the inflation yardstick by which  benefits and publuic sector pensions are uprated from the Retail Price Index (which includes housing costs) to the Consumer Price Index (which excludes housing costs). The CPI being normally significantly below that of the RPI, there is effectively a  loss in the future. This change will be followed by private pension funds.

Bank Rate at half a per cent has meant minimal returns for savers, which amounts to a loss because inflation exceeds the interest.  The cost of living for those on fixed incomes such as pensioners  has risen substantially above the official  inflation figures because people  on small incomes spend their income on a much narrower range of goods and services such as food, housing, clothes and heating than do the better off. Those essentials have risen more rapidly than the general price indices in the past few years.  

In the future people,  know for the next few years at best,  they are facing reduced pensions, a higher state retirement age, university education priced beyond the means of many, reduced wages, reduced benefits, reduced public services, higher rents, higher mortgages  and continuing uncertainty about their jobs.  There is also the looming problem of the gigantic public debt already built up and the seemingly unending problems with the banks both at home and abroad.  It is probable that  either taxes will have to be raised even further  or public services cut even deeper. It is also by no means certain that the recession is over and a double dip will not occur or the EU be sent into turmoil by the collapse of the Euro.

Those are the bare materials bones of our economic condition.  What they do not tell you is the mental anguish which comes from losing your job or fearing you will lose it; having to go onto short time working; not having a secure home in which to bring up your children.  People like Young, who comes from a comfortable middleclass  home, simply have no conception of such a plight. That is what makes his comments so obnoxious. He put his first foot in the mire by being factually wrong; the second foot followed as he adopted not only words but  a manner which made clear that he thinks those who complain are merely the rotten apples of society. This he did with his telling comments about people who thought the taxpayer owed them a living, this from a man who has never known what it is to be poor.

The truth is that, as with the Great Depression,  the only people who have never had it so good have been the rich, for their cost of living has reduced as asset prices drop and wages fall as people get desperate for work.

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