Sunday, 15 March 2015

Economic Myths: I can remember when mortgage interest rates were 15 per cent...

This is another one which the Baby Boomers like to pull out of the bag, sub-text: todays' first time buyers have never had it so good; high house prices are not a problem etc.

Superficially, the sums are like this:

Nowadays: thirty year mortgage of five time wages, interest rate 3.5%, mortgage repayments incl. principal repayments as % of wages = 25%.

Good old days: twenty-five year mortgage of three times wages, long run average interest rates average 8%, mortgage repayments as % of wages = 25%.

If interest rates nearly double to 15%, superficially you would expect mortgage repayments to nearly double.


What these people conveniently forget to mention is that inflation was pushing up their wages/eroding their mortgage at a rate of knots.

If you calculate annual mortgage payments as a percentage of inflation-adjusted wages, the picture for somebody who took at a twenty-five year mortgage of three times salary in 1970 is as shown.

In other words, there were a couple of years of pain at the onset, but after ten years, real mortgage payments had halved and after fifteen years they were a laughable 5% of wages:


Sackerson said...

I do remember Black Wednesday in 1992 when interest rates briefly hit 15%:

Inflation was around 4% at the time, and earnings inflation about 6%:

Mark Wadsworth said...

S, we can all remember that, but how high were mortgage interest rates and for how many minutes?

Mark Wadsworth said...

... to answer my own question, SVR had peaked in 1990 at about 15% and by 1992 was on a steady downward trajectory, Black Wednesday does not even show up as a blip.

Rich Tee said...

And they never mention that in those days savings rates dragged a few points behind mortgage rates, so if the lending rate was 15 per cent then the savings rate would have been about 10 - 12 per cent. A much better deal for savers than today's environment.

Mark Wadsworth said...

RT, possibly, but that whole thing is a bit murky.

Overall savings rates were possibly mildly negative like they are today. Getting a mortgage was more about having had a steady income paid into the same BS account for a couple of years, then the branch manager could approve your mortgage application.

Lola said...

This is how home-owner-ists are conned and con others.

It's an unholy alliance between the Welfare Warfare State that needs inflation to destroy its debts to savers, and the indebted HOI who need inflation to erode their debts to...savers.

Talk about double bubble.

A K Haart said...

When I first joined the public sector in the early seventies, I was advised to mortgage myself up to the hilt.

Everyone knew their secure jobs would allow them to take out the highest possible mortgage loan, their salaries would at least match inflation and repayments as a percentage of salary would fall rapidly.

And so it came to pass.

Random said...

Mark, what is YPP's banking reform views/proposals.
What do you think of this?

Lola said...

Random. It's not about making banks work it's all about stopping the Great and the Good from stopping them from working. Or more accurately stop banks being captured by the State. They are now (IMHO) a state sanctioned specially privileged cartelised supplier of a monopoly product engaged in counterfeiting.
But banking reform can only really happen when we have 'sound money'. The two things are flip sides of the same bad penny.
Good banking isn't actually that complicated. It's just necessary to stop the Powerful from buggering it up for their own ends.

Piotr Wasik said...

So, they started with a gamble and they won, didn't they?

Nobody had known inflation was going to erode the debt.

Woodsy42 said...

as Piotr noted, it was a gamble. As it happened inflation reduced the debt relatively quickly so it paid off for many people but nobody knew that when they took out the mortgage. Neither did people know in advance that house prices would inflate so quickly - it was indeed a gamble.
You are judging in hindsight which is grossly misleading and casts a completely false picture of the situation facing people taking out a mortgage back then.
For all we know exactly the same might happen within the next 10 years so todays mortgage holders might find their low interest fixed rate mortgages cost next to nothing by 2025. Do you have a reliable crystal ball with a range of 10-15 years?

Ralph Musgrave said...

In the high inflation environment to which Mark refers, it can actually make sense to pay interest by borrowing even more. If you DON'T DO THAT, then as Mark says, you face very big mortgage repayments in the initial years of a mortgage followed by near zero repayments later on.

Lola said...

MW Have you got the data from 1945?

Bayard said...

"You are judging in hindsight which is grossly misleading"

Well, not if you are countering an argument that is also judging in hindsight. What is "we had it tough back then" if it isn't hindsight?

Of course they don't mention that house prices were correspondingly lower back then, nor do they mention that today's borrowers are extremely vulnerable to a rate rise, whereas then, the only way that interest rates could realistically go was down, which was a bonus for them.

Mark Wadsworth said...

L, yup.

AKH, aha, thanks for back up.

R, it's on our manifesto page.

PW, W42, you have managed to completely miss the point of the whole post. Possibly deliberately.

I refer you to Bayard's explanation.

Rm, ta.

L, interest and inflation was pretty low until 1970 or so, this effect didn't happen. It is specific to the 1970s and 1980s.

Lola said...

MW. Yes, I guessed that - from data aI have. The thing is, many people were forecasting 'inflation', Ross Gooby for example. So, which came first? The inflation chicken or the interest mortgage debt egg?
The wisdom of crowds. I think that there may be a lot of 'unconscious knowledge' in all this.

Bayard said...

"So, which came first? The inflation chicken or the interest mortgage debt egg?"

I'm not ancient enough to have a clear memory of such things back in the 70s, but I do recall people talking about the difficulties of saving up for something because inflation eroded your savings faster than interest built them up. Thus it wouldn't be surprising that there was a popular change of attitude about getting into debt and borrowing money to be able to put what savings you had into an appreciating asset i.e. land.

BTW, talking about debt, I'd like to plug the excellent Radio 4 programme, Promises, Promises: A History of Debt ( ) which really should be subtitled "or why everything economists tell you about the origins of money and credit is wrong".

Lola said...

B I avoided listening to that prog. because it was the BBC and I am weary of their mindset. But on your recommendation I will now listen to it on catch up.

mombers said...

I wish that I was paying 15% on my mortgage. That would mean that I'd have bought my flat for a LOT less (everyone couldn't be paying more than 100% of their salaries on mortgages, right?) and I could trade up to a house for a LOT less than the current gap of several hundred thousand pounds. I'd also effectively be able to get 15% tax free interest on savings by paying it down.

Bayard said...

L, be warned, I have only got up to the C16th so far. As they get nearer the present, the BBC might start to intrude their mindset.

mombers, given that the 25% of wages figure seems to be a constant, you should be able to work out what you would have paid for your flat if interest rates had been that high.
Back in the 80's with interest rates at 7%, the rule of thumb in London was £20K a bedroom plus £10K, although one-bedroom flats were a bit more. OTOH, there weren't many of those around, then AFAICR.

Dinero said...
This comment has been removed by the author.
Mark Wadsworth said...

L, which came first?

The house price bubble, which the Heath govt then realised it had to deflate, and decided to mask the fall in absolute house prices with high nominal inflation (and constant nominal house prices). So then interest rates had to catch up.

This led to all sorts of friction (constant strikes for higher wages), and then Wilson/Callaghan continued the same bullshit.

Random said...
Land related violence. Of course it is coercive but WTF.

Random said...

I can see the opportunity for some good satire there:
Vile product of homeownerist US.