Mortgage pain is here to stay

Understanding the new normal of British economic stagnation

Although not as high as it was in the 1970s, inflation has been persistent. Where households are now being expected to pay an added £5000 a year as a result of rising rates, mortgage misery is also becoming widespread and apparent. Yet, politicians and commentators are failing to interpret the long-term message. To expect normality to resume is futile. The time has come to say that this is the new normal: the mortgage pain is here to stay.

Short-run matters – the dethroning of Boris Johnson as Prime Minister, the short tenure of Liz Truss, the weakness of the Bank of England in forecasting and then dealing with rising inflation, the second departure of Boris Johnson – have dominated the news. It’s time that we draw informed intimations for the long run from these short-run shocks.

For instance, further back in the 1950s, housebuilding became a politically vital concern. The era of Keynesian full employment inspired the dream of decent housing. The Labour government of 1945-51 had coped with some housebuilding for council estates but unusually in a bipartisan spirit, as Harold Macmillan continued it and got a lot of political mileage out of it.

Then, the Conservative party’s dream of a ‘home-owning democracy’ – that everyone but the working class should own residential property – grew political traction. The economy was growing steadily for the first quarter-century after 1945. Despite the difficulties of the 1970s with inflation and high interest rates, homeowning, rather than renting, was the dream of every household. Compared to western Europe, the British owned housing more than they had rented. Thatcher then allowed council house tenants to buy the property where they lived. This was revolutionary for lower income families who were likely not accorded the opportunity of homeownership.

The failure of Brexit to deliver the dream of steady growth is a big part of the current malaise. The question which haunted the UK since the mid-1950s – to join or not to join – through to the next 50 years, ending in Brexit in 2016 – is symptomatic of a search for a panacea to restore prosperity. For much of the period up to 2010, the idea of a steadily growing economy was taken for granted. Soon, somehow, everyone missed the oncoming stagnation of the British economy.

Since the shock of the 2008 stock market crash, the British economy has stopped growing. There is a surprising halt in productivity growth. While the UK still holds its place as the fifth largest economy in terms of total gross domestic product, there is no doubt that during the last dozen years, the UK has been stagnant. Even before the pandemic, the economy was faltering during the David Cameron/George Osborne period. There were fears of recession in the wait for quarterly GDP growth numbers to check whether there indeed was a recession with successive quarters of negative growth. Osborne was obsessed about budget deficits but had no solution for growth.

In a steadily weakening economy since 2008, the aspiration of homeowning is no longer within the income reach for the Great British public or at least the aspiring 20 and 30 year old as it once was. Perhaps it is best to rent for a while. Or maybe amass savings in the meantime. But as far as the British economy is concerned, owning houses as a means of wealth accumulation is off the table.

Meghnad Desai is Emeritus Professor of Economics at the London School of Economics and Political Science, Chair of the OMFIF Advisory Council and Crossbench Peer in the House of Lords. He resigned from the Labour party in 2020 after 49 years of membership.

Join Today

Connect with our membership team

Scroll to Top