I wrote a few weeks ago on our blog about how we’re all being asked to pay quite a high price for the government’s desperate effort to keep house prices high. Low interest rates might be helping the overstretched to stay in houses they couldn’t otherwise afford, but they are also stamping on the returns from our savings and allowing inflation and inflation expectations to bed down, I said.
Things haven’t got any better since. Inflation has stayed high (3.1% on the Consumer Price Index and a frightening 4.6% on the Retail Price Index), with rising food and clothing prices acting as a nasty reminder that modern China is a force for inflation, not for deflation.
And house prices, which are already 20% or so off their peaks in real terms, are falling anyway. The Halifax index shows prices down 3.6% in September and the just-released RICS numbers, for what they’re worth, have 44% of surveyors reporting a fall in prices over the month and just 6% reporting a rise. This trend is set to continue – all agents are reporting rises in sales instructions, but the tight mortgage market isn’t going to let buyers properly loose on those instructions for years to come. Note that the number of first-time buyers fell another 5% in August.
At the same time most people’s real net incomes are being slashed, be it by low nominal wage rises, pension disasters, rising taxes, the lack of interest on savings accounts, or benefit cuts. So much so that one firm of solicitors is warning that, due to the “maxed out” nature of their finances, the removal of child benefit from those earning more than £44,000 will lead to a new wave of repossessions. Those on £45,000 will be down £2,900 a year in gross terms. That’s 6.5% of total income, or three months of payments on a £140,000 mortgage.
It sounds ludicrous to suggest that child benefit is that important to relatively high earners. But even at the top of the tree, individual finances across the nation are in a more parlous state than you might think. Give a private banker a drink or two and he’ll tell you that his clients are remortgaging to pay school fees and asking for payment holidays until they get their next bonus. At the same time, credit-card spending, the last refuge of the desperate, is rising month by month. It doesn’t take much to push people over the edge financially these days.
You might think that high and persistent inflation will soon be enough to make the Monetary Policy Committee raise interest rates. But it won’t be. As long as the majority of its members think that a few grand might be all that stands between large tranches of the middle classes and the streets, rates won’t be going anywhere.