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Fixed rates will not make housing affordable
I find it hard to believe that encouraging long term fixed interest mortgages, as the government plans to, will really make housing more affordable. Here is why:
- Without the need to leave for interest rate rises, people will be willing to take larger mortgages, pushing prices up.
- Unless the yield curve is inverted, long term fixed rate mortgages will be more expensive than floating rate mortgages.
- It will make little difference to people borrowing after a rise in interest rates. It will not change affordability for first time buyers.
- It will take time to work: it will make little difference in the short term
If long term fixed interest mortgages do take off, then there will be a greater supply of fixed interest long term bonds (because banks will need to match borrowing to lending) and the result will be that the yield curve will be less likely to be inverted.
The key problem is that households are becoming smaller, so the number of households is rising much faster than population growth. What will make housing more affordable is increasing the supply of housing to match this demand. This is likely to run into opposition on environmental grounds. A large enough increase in the supply to make a difference may also provoke a backlash from those whose houses fall in price.
My own solution would be to:
- Abolish the domicile rules that make Britain a tax haven for the super-rich, who have a huge effect on London and certain other areas, with ripple effects on the whole country.
- Impose a tax on land, thus creating a holding cost to deter “land banking”.
What I think will happen is very little, very slowly. If the government procrastinates enough they can put off dealing with the problem for another twenty years when a falling population will deal with the problem, assuming that a recession has not caused a crash in the meantime.
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