The heavily-hedged generation will pay for the price crisis in the UK

The events of the past week were startling as Britain accelerated from difficult financial times to full-scale Bank of England intervention.

The UK economy is not insulated and much of the rest of the world is also being hit by the storm of inflation and the strength of the dollar, but it’s admirable to shoot yourself so hard that you cause yourself a small financial crisis.

It tends to pay off if you can keep your head when commentators are missing out on everything about you, so I’ll go easy on hyperbole and let the list speak for itself: pound collapse, gold yields soaring, pension fund collapse fears and mortgage chaos.

The debt-financed tax cuts in Quasi Quarting’s free mini-budget aren’t just responsible for the deadlock we’re in – a muddled Bank of England over the past year has to take some of the blame too.

However, as some corners of the markets were frustrated by last week’s 0.5 percentage point rise in the core rate to 2.25 percent, compared to the Fed’s larger 0.75 percentage point hike, it’s hard to see how this would have played out without Friday’s events.

It may be the case that Kwasi’s growth-seeking ideas are the kind we need to get Britain out of its post-financial crisis rut, but the problem was delivery.

Announcing such a bombardment of tax cuts and off-budget spending, or even a fall/spring statement, was unorthodox; To do so while being debt funded and without an OBR report by his side would have been folly.

Match that with an inflation rate of 9.9 per cent and hanging questions over the Bank of England’s monetary policy performance – and even its independence – and you have a recipe for your bold plans to backfire massively.

Trust is hard to win and easy to lose, and much faith in Britain’s prudent financial management has been shattered.

In the days of the financial crisis, I used to tell one of our correspondents about his overuse of the word carnage — but recent days have felt like carnage.

This culminated in the Bank of England making that intervention yesterday, with an emergency bond purchase in the “Gold Market Operation” which we describe here.

The bank will buy long-term UK government bonds to try to stabilize the market and stop yields from spiraling (remember that government bonds will be the boring, static part of the market).

The catalyst for this is reported to have been fears of a pension fund collapse, as final payroll schemes invested in complex derivatives-linked mutual funds faced huge cash calls.

We hope the Bank’s work will be successful and will also help stabilize the mortgage market, as borrowers have seen interest rates rise – adding hundreds of pounds a month to payments for those who find themselves in the unfortunate position of needing to re-mortgage.

I spoke to borrowers this week who are facing their monthly bills rising by £400 or £500, because they are coming off cheap fixed-rate deals obtained two or five years ago and are facing much higher rates now.

To put this in context, at the start of the year, Nationwide had a five-year flat rate of 1.49 percent, after repricing this week the five-year Building Community Fixes starts at 5.19 percent.

On a £250,000 mortgage over 25 years, that’s the difference between paying £999 a month and £1,489, aka £490.

Many of those whose home loan repairs expire at any point in the next two years are deeply concerned about the repayment shock they face, but the most immediate scenario is for those whose deals expire in the next three to six months.

Not only are they staring down the barrel of much higher rates but they’ve also seen lenders ax deals or pull out of the market for new business this week, creating a sense of panic.

Don’t panic, as we explained in What To Do If You Need A Mortgage Proof, the brokers we spoke to this week assure us that deals are available, but add that rates are changing quickly and call volumes are still there. Running very high.

Normally, when the fear meter is raised, it’s the worst time to try to do something, but for those who need to secure a mortgage, the problem is that there is also speculation that the Bank of England may now need to raise the base rate to 6.25 percent.

I’d like to wonder if he can actually get there before the severe financial pain of people loafing on hikes. But I also didn’t expect rates to rise as quickly as they have this year — and I spent years defending higher rates when the bank shut down.

Borrowers have every right to be upset here, as they have spent years reassuring central banks that when interest rates rise it will be gently and gradually.

Instead, it turned out that the move up was long delayed and then the hikes were executed brutally and swiftly.

I’ve spent years writing about mortgages and home prices and regularly post updated versions of the above chart, showing home prices versus wages.

It shows how even after the financial crisis, real estate values ​​have not returned to their long-term average and how that percentage has increased since 2012.

Homes are more expensive relative to earnings than they ever have been, and it was pretty clear that unless wages started to rise exponentially, this was going to be a problem when interest rates started to go up.

This same concern has been regularly expressed by others, yet it has been firmly dismissed as an irrelevant issue by many in the financial industry.

The message from those presumably in the know was that it didn’t matter because mortgage rates were low and monthly payments were affordable – now they spiral up and borrowers strike.

Will we see any banks, building societies, other financial firms, or even regulators raise their hands and say, “Sorry, we were wrong?” I seriously doubt it.

This will lead to another bout of generational inequality, with the generation of heavily mortgaged homeowners in their 40s, 30s, and 20s facing the pain.

This person in the example above with a £250,000 mortgage could be an individual earning £60,000 per annum. They are looking at around £6,000 a year in mortgage payments which will eat up £10,000 a year before tax from their earnings just to cover the extra costs of staying in their homes at higher rates.

I know there will be many who read this column who remember the pain of property in the early 90’s and dismiss complaints about 5 percent mortgage rates with a cynical look.

However, house prices were lower compared to wages back then, and if you adjust to affordability, much lower rates would be required to cause the same pain now.

this is Sky’s Ed Conway adjusted price chart for affordabilitybased on research by Neil Hudson of BuiltPlace, makes this point, showing that rates of 6 percent today would bring a similar mortgage burden into the double digits of the early 1990s.

Let’s hope the Bank of England and government get this situation under control quickly, in the meantime This is Money will keep you updated on what you need to know and what it means for you.