Last week on the Deep End, we took a look at the figures showing a massive decline in homeownership among people in their twenties. On average they have to wait much longer than their parents’ generation before they can afford to buy their first homes.
However, if they wait too long, they may never get the chance. New rules mean that banks and building societies are increasingly reluctant to lend to people in their forties – on the grounds that they won’t have enough years of working life left to them to pay off their mortgages.
Aspiring homeowners therefore find themselves caught in a shrinking window of opportunity – a diminishing age range in which they’re old enough to get started on a mortgage, but also deemed young enough to see the process through.
It’s a seemingly insane situation, but one that does have a certain logic. After the lending mayhem of the previous decade, the move towards greater caution is generally a good thing. Plus there’s a more specific reason why lenders need to worry about the age of their borrowers – the fact that paying off a mortgage is a longer, harder slog than it used to be.
The point is unpacked in an important article by Tim Harford for the Financial Times (and available on his Undercover Economist blog):
“…contrast today’s low-inflation economies with the high inflation of the 1970s and 1980s. Back then, paying off your mortgage was a sprint: a few years during which prices and wages were increasing in double digits, while you struggled with mortgage rates of 10 per cent and more. After five years of that, inflation had eroded the value of the debt and mortgage repayments shrank dramatically in real terms.
“Today, a mortgage is a marathon. Interest rates are low, so repayments seem affordable. Yet with inflation low and wages stagnant, they’ll never become more affordable. Low inflation means that a 30-year mortgage really is a 30-year mortgage rather than five years of hell followed by an extended payment holiday. The previous generation’s rules of thumb no longer apply.”
It’s not just a case of low inflation, but of smaller pay increases too. Not only is the real value of the mortgage inflated away at a lower rate than before, it also has to be paid out of an income that grows more slowly – if it grows at all.
This helps explain the caution about lending to older people – and it certainly explains the disappearance of the interest only mortgage. In fact, one has to ask why this form of lending was still so common just a few years ago. Truly, the first decade of the 21st century was an age of grotesque irresponsibility – one for which the politicians and financiers of the time have yet to be held properly accountable.
A further consequence of the cheap money and easy credit of this era was to make higher house prices seem affordable. Though prices shot up as a multiple of average wages, the policy of artificially low interest rates and lax lending conditions had an offsetting effect on what the market was able to bear.
Ultimately, this created the appearance of a one-way bet on property prices (and, for those who got their timing right, the reality of one too).
As Tim Harford explains, a distorted property market distorts the whole economy:
“A study by Indraneel Chakraborty, Itay Goldstein and Andrew MacKinlay concludes that booming housing markets attract bankers like jam attracts flies, sucking money away from commercial and industrial loans. Why back a company when you can lend somebody half a million to buy a house that is rapidly appreciating in value? Housing booms therefore mean less investment by companies.”
Harford memorably describes this effect as the “economic equivalent of a tapeworm infection.”
By depriving the real economy of investment, productivity is damaged and so, by extension, are wages – meaning that those without capital are deprived of the means of acquiring any. Meanwhile, those who do have capital – especially capital invested in property – have the value of their assets artificially inflated (and bailed-out when the banks crash).
In summary, the big economic story of our times is one of cascading economic and social distortions that have pushed up property prices, damaged productivity, suppressed wages, encouraged indebtedness, exacerbated inequality, de-capitalised the young and enriched those who haven’t earned it.
And at the heart of it all is a policy of fiscal and monetary recklessness in which politicians of both left and right are deeply implicated.
Shame on them all.