Former Conservative MP and broadcaster Edwina Currie has sparked fierce debate today in her discussion of the current mortgage crisis.
“All the baby boomers who are now mortgage-free home owners went through paying interest rates three times what they are now,” she tweeted in response to a Sky News story.
“Sixteen per cent was normal. We didn’t have much choice, but home ownership rocketed, and we survived.”
Comparisons with the savings and loan crises of the 80s and 90s have frequently been made during the recent spike in interest rates, particularly among commentators of the baby boomer generation, many of whom are now in their seventies.
But is it fair or even accurate to compare the two?
Houses used to be much more affordable
For a long time, Britain had a scarcity of long-term fixed-rate mortgages compared to the US and Europe, where homeowners can choose between 10, 15, 20 or 30-year terms.
Fixed-rate mortgages were first introduced in the late 80s.
Halifax launched its first product in 1989 at a rate of 12.75 per cent and the standard variable rate peaked in 1990 at 15.4 per cent, though the average throughout the year was 14.3 per cent.
On the face of it, that seems a lot higher than current predictions that rates will go above 6 per cent in 2023.
However, economists say the interest rate isn’t really the most important factor, it’s the affordability of those rates that is key.
In 1990, the average household income in the UK was about £12,300 and the average cost of a house was just under £58,000.
But since then, house prices have soared much faster than income.
In 2022, average household income was around £34,000 and the average cost of a home was £294,000.
Today’s mortgage holders are now far more indebted than they have been historically.
Housing analyst Neil Hudson says that if actual mortgage rates are adjusted for against their affordability, 13 per cent in 1990 was the equivalent of around 6 per cent today.
Dr Muhammad Nasir, from Leeds Business School, told i: “In the 70s and 80s when we had inflation, interest rates were a lot higher than we have now.
“And whereas now we are seeing the Bank of England increase rates very gradually, back then the rate increases were a lot sharper.
“But on the other hand, house prices are a lot higher relative to our income.
“Households are spending a lot more of their income on mortgages, house prices have gone through the roof so it is very painful.”
‘It’s a very different environment, it’s not the same’
Dr Nasir said between the 90s and the global financial crash in 2007, Western economies such as the UK enjoyed relatively low inflation and therefore low rates.
“Global inflation has been coming down and we’ve had a very open economy,” he added.
“In that environment there was more liquidity and more money and rates came down.
“After the 2008 crash we had low growth but inflation has stayed relatively calm until post-Covid.
“Now it’s a very different environment, it’s not the same. Our expectation is that that rates will increase a little bit further and probably remain there for the foreseeable future.”
Figures released by the the Office for National Statistics today showed government debt reached more than 100 per cent of national income for the first time since 1961.
The Chancellor, Jeremy Hunt, said the Government is facing “difficult decisions” to balance the books after the Covid-19 pandemic and Russia’s invasion of Ukraine.
Dr Nasir added: “The UK is a highly indebted country and high rates are going to be very painful and unaffordable for some people.”
