Mortgage Interest Rates

Part of Orders of the Day — Supply – in the House of Commons at 5:35 pm on 26 November 1979.

Alert me about debates like this

Photo of Mr Donald Anderson Mr Donald Anderson , Swansea East 5:35, 26 November 1979

The hon. Member for Croydon, South (Mr. Clark) spoke of hypocrisy. If his arguments about belt-tightening are valid now, they were valid at the time of the drafting of the Conservative Party manifesto, when the Conservative Party said that its plans for cutting Government spending and borrowing would lower the mortgage rate. They were valid also in July, when the Prime Minister gave an indication to the Building Societies Association that the high interest rates, the record MLR at that time, would be of only short duration. That intervention by the Prime Minister was made purely for political reasons, knowing that if the mortgage interest rate had increased at that time it would have erased at one stroke the benefits that the Government claimed would be given to the average man as a result of the Budget.

What I find most significant about the debate is the new chastened Secretary of State who has emerged. Exit the brash Sir Galahad; enter the Micawber, hoping that something will turn up. He came in and rapidly departed, with his tail between his legs.

This record mortgage interest rate is important in itself. It is a crushing blow to the hopes of many new borrowers and many prospective new borrowers. It is important also as an indication of the credibility of the Government and of their policy on interest rates.

One knows the strategy of the Government at the time of the June Budget, which was so welcomed on the Government Benches. The Government talked of an incentive society, reducing the burden of taxation, abandoning incomes policies and relying wholly on monetary constraints. The monetarism that they now espouse is a fine paper model but clearly it does not work in the real world, where men and, indeed, banks do not act as rationally as the Government would wish. That scenario seemed implausible at the time—there was no empirical basis on which it could be founded—and it has appeared more implausible as it has unfolded, particularly because of the increase in MLR and the Budget.

In June the Chancellor boasted about the effect of the Budget on the average family man. He said that income tax changes mean that for the married couple where the husband earns £100 a week, which is close to average earnings, there will be an increase in take-home pay averaged over the remainder of the financial year of over £4 a week. The increases in VAT and petrol duty will increase average family expenditure by about £2·75. So that, taking both the direct and indirect tax changes into account the average family will be about £1·30 a week better off."—[Official Report, 12 June 1979; Vol. 968, c. 261.] Where is that average family now? How much better off is it after these record mortgage increases? Where is now the boasted incentive, so shortly after the June Budget, when, indeed, the books were open? The picture could have been seen by the Government, had they chosen to see it. The assumption of the Prime Minister, assuming her bona fides—with the arm-twisting of the Building Societies Association by her or by the Secretary of State for the Environment—was that interest rates would fall reasonably speedily after the Budget. That has not happened. It has not happened because at that time the Government, as an act of policy, increased inflation by 4 per cent. as a result of the Budget changes and have increased inflation since as a result of other policy changes. That deliberate Government policy has added to inflation. The effect of this record mortgage interest rate will add something short of 1 per cent. to the RPI.

It was not only the average mortgage holder who was conned by the Tory manifesto. The man with a mortgage in excess of £25,000 had been led to expect some relief. I recall that in the Second Reading debate on the Labour Government's Finance Bill the then Shadow Chancellor said that the mortgage interest relief provision will continue as it was last year, in order to maintain the status quo at £25,000 maximum". He added that the changes represent a continuing increase in the real burden of taxation."—[Official Report, 3 April 1979; Vol. 965 c. 1199.] The implication was that at an early stage the next Tory Government would increase that limit and therefore reduce the burden on the man with a high mortgage.

In his speech today, the Secretary of State gave some indications that this record mortgage increase reflected a shift in Conservative policy. Was it such a shift, or were the Government simply reacting wildly to a crisis of their own creation? Are they acknowledging the many complaints that the attractiveness of the financing of housing is at the cost of industrial investment and away from the stock market—the crowding-out argument? Are the Government deliberately trying to make housing more expensive, on the brave but perhaps rather foolhardy argument set out by the hon. Member for Lichfield and Tamworth (Mr. Heddle) in his speech today and in his response to The Guardian? If he carries on in that way and says these things to the mortgage holders in his constituency, I suspect that he will be a young man with a great future behind him.

The argument about crowding out has a certain plausibility, but if this is part of deliberate Government policy the Government should say so clearly and use all their other available means to divert financial resources into industry. But it sounds unlikely because we have to recognise that at a time when the Government are increasing the housing problem in the owner-occupied sector they are also making more difficult the possibility of having council houses, because of their reduction in finance for local authorities. There has been a fall in starts in the private sector this year, in any event. It is also inconsistent with the previously announced plans of the Government.

In mid-August, it was said that the Treasury was undertaking a long-term study to increase the finance for the mortgage market by attracting funds from banks, insurance companies and pension funds. Here I stress that the word used was "increase" and not "substitute". The argument about a deliberate policy is not, therefore, supported by the establishment of that study in August, or by the announcement on 8 November this year by the Secretary of State that he was establishing a new group to review finance for home ownership, as the Government's objective was to encourage a substantial growth in home ownership. What a launching present for this new group established only on 8 November.

One must accept that the interest rate increase reflects in part the movement in world rates and that we cannot be immune from that development, but there has been a deliberate increase in our domestic rates as a result of Government policy, partly from the Budget, as I have mentioned, but also indirectly by the ending of exchange control. The Government have increased rates to prevent money fleeing overseas from this country—money that might otherwise have been used for the purchase of Government stock. Therefore, they have to increase domestic rates to attract money that might otherwise flow overseas.

The increase in rates is in part the reflection of world developments, but it is in substantial part the result of deliberate Government policy since June. I wonder what is now the feedback from the constituents who, presumably, Conservative Members have met over the past weekend. I wonder how many Tory voters, seduced by the promises of tax reduction in the Tory election pledge, now realise the extent to which they have been conned. How many Tory voters will be better off as a result of the combination of the Budget and this mortgage increase?

If there is any mitigation, the Government might claim that this is an unfortunate increase, which has resulted from a variety of reasons—world rates, the delay in the collection of VAT, and so on—and that it will be of short duration. But what is the evidence for the suggestion that it will be of short duration? We know that the interest rate structure will reflect quite faithfully the rate of inflation in the economy as a whole. The current rate of inflation is 17·2 per cent. We know that that rate of inflation will be fuelled by a series of increases which are now in the pipeline—electricity, gas, coal, rail fares, rates—and that, therefore, the prevailing inflation rate will increase to not less than 20 per cent. The prospect of there being a rapid fall in the mortgage rate is a very dim one. Even though some building societies, as the hon. Member for Lichfield and Tamworth said, may say that they will extend the mortgage terms to soften the blow, I wonder for how long they will do that. Several societies have said that they will do it for only a short time and for those who have taken out their mortgages after 1976–77, or in that sort of period. Perhaps there will be some mitigation, but it will be a very small degree of mitigation, given the expected length of duration of these very high interest rates.

There will also, of course, be an increase in the pressure on building society rates as a result of the Government's policy on the sale of council houses. In support of that proposition, I quote from the Government's own consultation paper on the sale of council houses, in which paragraph 19 states that The Government will encourage as many tenants as possible who buy their homes to fund their purchase with a private sector mortgage. Even before the record increase that this Government have imposed on mortgage rates, we had the warning from Sir Hubert Newton, quoted in The Guardian of 23 October last, that a mortgage rate of 16½ per cent. against a current 11 per cent. would be needed if societies had to attract extra funds to meet the increased demand for home loans That was from those currently in the council sector. That is another factor which will, at the very least, keep rates at their historic high level and is likely yet further to increase the rate of mortgage interest.

I accuse the Government of economic incompetence, of blindly following an untried economic doctrine, and of being out of touch with our own people. We know that a Cabinet of millionaires is unlikely to sympathise with new and prospective borrowers from building societies. I accuse the Government of destroying the basis of their electoral support more speedily than any other Government in our history.