In reality, interest rates are just getting back to normal
MATTHEW LYNN - Daily Telegraph
17 October 2022 • 6:00am
We are about to be engulfed by a mortgage crisis. People will lose their homes, and the rest of us will be trapped by negative equity. Companies will go broke on an epic scale, and Conservative Party backbenchers are already contemplating new careers as they face the fury of voters.
Amid the fall-out from the mini-Budget, it is assumed that the higher gilt yields, and the rise in interest rates that will follow, are a catastrophe for the UK – and one the Government will pay a high price for.
But that is not really true. Sure, there are some losers. Anyone with a two-year fixed rate expiring in the next few months may face real difficulties. And some buy-to-let landlords may find the sums don’t add up anymore. And yet there are lots of winners from higher rates as well. Annuity rates are soaring, making pensions far healthier.
House prices will fall in real terms, helping younger people on to the property ladder. Savers will be able to make a return, and while there are some zombie companies out there the corporate sector as a whole has hundreds of billions of cash that can earn interest again. Add it all up, and there are far more winners than losers. In reality, 5-6pc interest rates are completely healthy. There may be a few bumps along the way, but we should stop catastrophising and celebrate their return.
We call all debate whether the mini-Budget triggered higher interest rates or not. One point is beyond dispute, however. Interest rates, led by the Federal Reserve, are going up sharply around the world in response to rising inflation. The UK would have hit 4-5pc over the next few months regardless of which government was in power, and mortgage rates would have spiked upwards at the same time.
To listen to much of the commentary, rates at that level will crash the economy, and we will all soon be much poorer. Martin Lewis, TV’s money expert and a man who seems intent on taking us towards full state control of everything, has been leading the campaign for some form of bail-out to deal with the so-called crisis, while the Liberal Democrats have already started distributing leaflets in the leafier areas of the Home Counties blaming the Government for the rise.
In truth, we should all just calm down. True, there are some people who will suffer from rising rates. If you have a two-year fixed rate mortgage coming towards its end, you are likely to see a steep rise in monthly repayments. But let’s keep some perspective. Of the 24 million homes in the UK, only 6.8 million have a mortgage on them (the rest are rented or owned outright).
On current statistics, about 500,000 fixed rate deals will come to an end over the next six months. That is about 2pc of total households. Let’s keep in mind as well that most mortgages are held by the relatively affluent (according to the Institute of Fiscal Studies, 54pc of top quintile households have a mortgage, compared to less than 20pc of the bottom quintile). Many of them may well have savings they can use to pay off some of that debt: perfectly sensibly, many people didn't bother paying off the mortgage when they were on 1pc fix. In short, there will be relatively few people who are affected, and most of them are better off than the average family. They can probably cope just fine, even if they have to skip the skiing holiday this year.
Of course, some buy-to-let landlords may well find their properties are unprofitable once higher interest rates kick in. In that case, they can simply sell. Buying properties with debt to rent out is a commercial enterprise and if a few turn sour those are the breaks. Indeed, we have spent the last ten years doing everything we can to drive private landlords out of the market, so it seems odd that people now seem to be worried that they might have to sell up.
Against that, lots of people benefit from higher interest rates. Annuity rates are already soaring - up by almost 50pc to the last nine month to the highest level in 14 years - so anyone approaching retirement is suddenly going to be a lot richer. Indeed, pensioners will soon be doing so well that the Government may well be able to end the ridiculously unfair triple lock on pensions, creating tens of billions in savings to spend elsewhere.
Savings rates will be meaningful again, at least once the banks pass them on to depositors (and if they don’t up the interest offered soon the web start-ups will eat them for breakfast). People can save and plan for the future again. House prices are likely to fall substantially, at least in real terms, even if we hopefully avoid a crash, and that will make it far easier for young people to take their first step on the property ladder.
And, finally, while there are a few zombie businesses out there that will finally be put out of their misery by higher rates, most British companies actually have plenty of cash. One Bank of England study found the corporate sector has £750bn sitting on its balance sheets. Just like ordinary households, it can start earning some meaningful interest on that, and put the profits to work in their business, while the whole of the banking industry will finally be profitable again now that it can get back to making a margin on the difference between deposits and loans.
In reality, interest rates are just getting back to a perfectly normal range of between 4pc and 6pc. They have been at those levels for most of the last 300 years. Indeed, they have often been a lot higher, and when we measure them in real terms, after allowing for inflation, they are still very low. Sure, there will be some bumps along the way, and a few people will suffer some significant losses. But we should be celebrating getting back to normal, and stop catastrophising. Most of us will be better off.
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