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There is another problem that is a simple point of arithmetic and logic, but I sense that the Chancellor and some of his Ministers do not fully appreciate it. Since the last experience, prices and mortgages have increased enormously in absolute terms. The absolute value of a mortgage has grown from £40,000 in 1999 to about £160,000. In relation to earnings, the level has doubled. In practical terms, that means that somebody trying to buy a house has to pay roughly twice the amount in mortgage servicing as they would have done in 1990. Interest rates may have halved, but the total mortgage outlays are the same because the mortgage is
so much bigger. That accounts for the fact that so many households are under enormous stress.
The Chancellor would argue—he is right up to a point—that these days we have a sensible way of managing interest rates with the Bank of England, and the Bank of England can cut interest rates. The context is rather different, however. The interest rates set by the Bank of England rose from 5.5 per cent. in March 2003 to 7.5 per cent. in July 2007—an increase of 2 per cent. Since then, it has been trying to cut rates, but the experience of households is not that of rate reductions. The alarming fact is that many households face increased interest rates because the banks are not passing on the cuts. They are not doing that because there is a credit crunch and credit has become unaffordable. Even those who have to refinance mortgages and can get them, which is unusual, pay increased rather than reduced rates.
Julia Goldsworthy (Falmouth and Camborne) (LD): Does my hon. Friend share my concern that 60,000 families now take home less than £1,000 a month and spend 75 per cent. of that take-home pay on mortgage repayments? Those people will feel the pressure, and nothing is being done to tackle the problem. The figure for those affected is more than double the total number of repossessions last year.
Dr. Cable: My hon. Friend is right. She describes an extreme situation, but many others approach that position. If interest rates remain high because of the crisis in the banking system, many people will find current circumstances unsustainable.
The key point in the Chancellor’s comment that I cited, about which he was right, is that unemployment is much lower. That specific problem does not therefore exist. However, I noted from the Red Book a table that describes the assumptions that the National Audit Office audited. The Government are assuming—I do not know whether the Financial Secretary is aware of it—an increase in unemployment this year of approximately a couple of hundred thousand to a million. That may be a small change, but the Government acknowledge in their forecast that unemployment will increase, albeit at a low level. People find their mortgages unaffordable for many other reasons, such as short-time working and lack of bonuses.
The new dimension, which changes the picture, is the fall in the price of homes that is beginning to occur. The obvious reaction is to believe that that is a good thing. If homes are unaffordable, it is surely desirable that their prices decrease to a more sensible level. That is correct, up to a point, but it depends on the extent to which and the speed at which it happens.
According to the Nationwide’s estimate, we have had five months of continually falling average prices. We have a forward market for property, which suggests that prices will fall by 10 per cent. this year and that, in five years, they will not increase at all—in other words, they will fall substantially in real terms. Some forecasters are talking about falls of 25 to 30 per cent. in a couple of years. Although the Government sensibly do not venture into forecasting houses prices, they assume that the market is heading for genuine difficulties. We know that because of the Red Book’s pessimistic forecasts for stamp duty receipts, which are due to fall by £800 million. They therefore assume a big fall in transactions.
The Council of Mortgage Lenders confirms that 3 million families currently have properties with a loan-to-value ratio of more than 90 per cent. If the numbers that I have cited, such as the 10 per cent. fall in a year, materialised, all those families would be in negative equity in a year. That is happening to many people now.
Mr. Greg Knight (East Yorkshire) (Con): Is there not another new dimension that needs to be taken into account? Does not the hon. Gentleman accept that, back in the Lawson years, most borrowers would lend only up to two and a half times a family’s annual income, whereas nowadays, some borrowers lend up to five times the annual income?
Dr. Cable: The right hon. Gentleman is a right. A great deal of reckless lending is involved. The Financial Services Authority—the regulator—made that specific point a few weeks ago, when it estimated that 1 million families are at serious risk because of income multiples of around 3.5, as well as high loan-to-value ratios. There is a specific category of 1.4 million families who have taken the two-year, fixed-rate mortgages—teaser mortgages, as they are called—and now have to renegotiate them. Many find that they cannot raise the capital, that high deposits are being demanded of them or that even if they can raise the money, their interest rates are increasing from 4 per cent. to 7.5 per cent. That is only on the mortgage. Many were given unsecured loans, which are increasing to 15 per cent., as a part of the package. The position is therefore unsustainable for many of those 1.4 million families.
We are beginning to see evidence of that in the repossession process. The Government amendment correctly points out that repossessions are much fewer than in the previous major financial crisis that we experienced. There were five years in the early 1990s when 300,000 people lost their homes, and the rate last year was about 27,000. The prediction of the Council of Mortgage Lenders for this year is 45,000. That is somewhat reassuring, but I do not know whether Ministers have spotted that the first stage of the repossession process—the so-called orders, which go to court—now operates at a comparable level to that of the last slump. There are various reasons for that. Banks are no longer friendly, local high street banks. The securitisation of much mortgage debt means that many repossession orders are triggered by computer and no personal relationship is involved. As soon as somebody gets into difficulties, the order goes to court and that person is in the first stage of the repossession process. The problems may well be a great deal worse than in the last housing slump because of such changes.
Philip Davies: The biggest employer in my constituency is probably the Bradford and Bingley bank. My experience shows that it does all it can to help people stay in their homes and that repossessing people’s property is a last resort. I hope that the hon. Gentleman will not try to go for an easy hit by attacking banks when many do an awful lot to try to help people stay in their homes.
Dr. Cable:
The hon. Gentleman has a romantic view of contemporary banking, which is not reflected in the reality that most people experience. Perhaps he should
have been here late on Monday when we discussed Northern Rock, which is one of the most aggressive banks.
Sir Robert Smith (West Aberdeenshire and Kincardine) (LD): Is not there a growing concern that it is not necessarily the mortgage but the credit card and other debts, about which there is even less tradition of concern for the individual, that trigger repossessions?
Dr. Cable: My hon. Friend is right. An especially nasty trick is being played at the moment whereby many banks offer “Together mortgages” that are 125 per cent. of the value of the house. The extra is used to buy cars and go on foreign holidays. Anyone who defaults on the extra bit, above the mortgage, can be taken straight to repossession. That is happening.
The current crisis could be much more difficult than the previous one because there are no safety nets. The right hon. Member for Hitchin and Harpenden (Mr. Lilley) made an important policy decision when he was in government. I am not making a personal comment, but referring to his ministerial record. He abolished the system whereby people could go to social security for help with mortgage payments. It now takes nine months before that position is reached. In reaching that decision, the right hon. Gentleman made the calculation, which was probably realistic at the time, that half of all borrowers would take out insurance in future. In practice, that has not happened. Only one fifth of households have taken out insurance. We are now in a different environment from the early 1990s, and there is no safety net. There is no social security assistance and there is no insurance. A comparable degree of pressure on payments therefore results in a much greater likelihood of people being taken to court and losing their homes.
Alistair Burt (North-East Bedfordshire) (Con): As a former Minister in the same Department as my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), let me tell the hon. Gentleman that the calculation was also made that, in the first instance, building societies would renegotiate and spread their payments for six months, thus relieving a pressure on the taxpayer, but not putting individual householders in a more difficult position, and that was indeed what happened.
Dr. Cable: That might have happened at the time, but it is not happening now, and I will come to how we might address that failing.
Andrew Stunell (Hazel Grove) (LD): Does my hon. Friend agree that his figure of one fifth for insured households might be too optimistic or an overestimate of the cover available? Many of my constituents have found that those insurance policies do not work at the exact moment they need them to work.
Dr. Cable: That figure probably is an overestimate, which also reflects the fact that many policies are extraordinarily expensive. Those who now recommend insurance as a way of dealing with the problem fail to take into account the large cost associated with payments protection insurance, so my hon. Friend is right.
The concluding part of my remarks is about what can be done. Again, I want to be constructive and raise questions about ways forward, rather than just criticise how things are being managed now. First, what can be done within the conventional policy framework? Normally when there is an impending recession, the standard answer, which we learnt or taught from economics textbooks, is to cut interest rates and run a budget deficit—they are the standard apparatus of macro-economic policy—and that is indeed happening aggressively in the United States, but not here. We know that that is happening in the United States, because the chairman of the Federal Reserve, Mr. Bernanke, did his PhD thesis on the great depression from 1929 onwards. He is terrified, and says so publicly, that we are in danger of repeating that experience. He is desperate to head it off and is doing whatever he can.
Our problem is that the Government are enormously constrained in what they can do that is similar. They made a good decision 10 years ago to make the Bank of England independent. The Bank now sets interest rates, which are not politically driven, and is making it absolutely clear that its first responsibility is to follow its mandate, which takes account of inflation, which is currently above the level that it should be pursuing. Therefore, the Bank’s scope for cutting interest rates aggressively is limited. In addition, the Government claim that they have stayed within their rules for fiscal policy, but we do not know that, because there is no independent monitoring. In fact, the Government are up against the very limit of their fiscal rules and have absolutely no scope for the kind of expansionary policy that one would hope for in a period of recession.
Even if it were possible to do those things—to cut interest rates aggressively and run a fiscal deficit—there is little evidence to suggest that they would solve the problems that we now face, because interest rate cuts are not being passed on by the banking system, for the reasons that I have described. The conventional policy framework is therefore not adequate. The question is whether we could reform it.
My colleagues and I have argued for several years that the Bank of England should have within its mandate a responsibility to take account of the housing market, not just conventional inflation. If the Bank had done that, it would have raised interest rates sooner, in the boom, and would be able to cut them more aggressively in a slump, now. That is one concrete suggestion that should be considered.
The second policy question is whether the Government should simply be watching the drama of repossession unfold or whether they should intervene to do something about it. The Government’s position is currently entirely passive. They take the view that there is no great problem, and that in any event it is nothing to do with them. However, we should perhaps at least consider what the options are.
The first option, which the Council of Mortgage Lenders and several non-governmental organisations, such as Shelter and the citizens advice bureaux, are pursuing, is for the Government to revive the pre-1994 idea of giving greater social security help to people in mortgage difficulties. It has been suggested that it would help, for example, if the Department for Work
and Pensions could secure a second charge on a home as a way of giving extra help. That is not the best way forward, because we would effectively be transferring all the risk from the mortgage lenders who made loans in the first place to the taxpayer. However, if the crisis develops momentum, that kind of idea might have to be considered.
What else could be done? One possibility, which we are keen to promote, is for the lenders to have much greater responsibility, so that if a default is triggered, there should be a process whereby the debtors have access to independent financial advice and the banks are required to offer a range of payment alternatives, which might include shared ownership, for example. The banks will say, “Well, that’s all in our code of conduct,” and indeed it is, but there are plenty of rogue lenders who are not bound by that code and others who do not observe its spirit. My question for the Government is whether they are considering the arguments for and against making the code of conduct binding on mortgage lenders, requiring them to do what is currently regarded as good practice.
Jim Cousins (Newcastle upon Tyne, Central) (Lab): The hon. Gentleman has spent the past year denouncing the lending practices of banks in the most dramatic terms, using such expressions as “close to a scam”, “irresponsible lending”, “rubbish mortgages” and “poor assets”—that was his phrase on Monday night. Now that he is staring the consequences of his own policies in the face and does not like them, his solution is to compel the banks to carry the problem, in the middle of a liquidity crisis, on their balance sheets.
Dr. Cable: I would have thought that the simple logic is that if lenders have behaved irresponsibly, there is an obligation on them to behave more responsibly in future. I will come to the question of how that affects liquidity and the balance sheet—quite rightly, because that is part of the argument—but there certainly should be an obligation on banks that have lent irresponsibly to the people who have borrowed and are now in considerable difficulties.
Simon Hughes (North Southwark and Bermondsey) (LD): In looking for solutions, may I say that many families—probably more in the past year than at any time over the past 25 years in which I have been here—are coming to me with multiple debts and pressures in respect not just of their homes, but of credit cards and the like, which my hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith) mentioned, so could not the Government add one other thing to the list? Could they spend a bit of the money that they spend on publicity on helping people to go to the one-stop-shop advice centres that exist, which can consider their position in the round and give them advice that enables them to manage their way out of the problem, rather than just rely on the banks or one agency to help in their sector, while those people are struggling with the rest of their debts?
Dr. Cable:
That is a constructive suggestion, which builds on a policy that we have been arguing for. An excellent report was published for the Government a few weeks ago by Mr. Thoresen that developed that point. Unfortunately, like so many other good reports
prepared for the Government, it is in danger of sinking without trace, because it requires somebody to take responsibility for rolling out a network of advice, which, as my hon. Friend correctly says, is so necessary.
The final option that we need to consider is whether, in current circumstances, the Government, or social landlords on behalf of the Government, should act as a buyer of last resort in housing markets that are falling rapidly. In cities such as Leeds and Manchester, there are large amounts of empty buy-to-let accommodation that cannot find a user, quite apart from the properties that have been auctioned off as a result of repossessions. Social housing has been sold off over the past 10 to 15 years, as a result of the right-to-buy policy, but we now need to ask whether that policy should, in some degree, go into reverse, partly as a way of sustaining the market and partly as a way of providing more social housing where it is badly needed. That would clearly require an investigation of the borrowing powers of social landlords. I wonder whether the Minister could give an indication of whether the Government are thinking about that.
Julia Goldsworthy: It might help my hon. Friend if I set that point in context: 1 million fewer homes are now available for social rent than at the time of the last housing market fall. In the last 10 years, we have seen social housing waiting lists rise by 60 per cent., so we are already in a position of high demand, which could get a lot worse.
Dr. Cable: My hon. Friend is absolutely right. That is another reason why the repossession crisis is so severe. It is not just a matter of people not having safety nets; the problem is that there is nowhere for them to go if they are repossessed. They are put into a desperate situation with virtually no social housing. There is an opportunity for the Government to reverse the negative net sale of public housing, which has been so damaging in the past.
Let me move on to a third area where the Government should be thinking of reform and change. I want to respond directly to the intervention of the hon. Member for Newcastle upon Tyne, Central (Jim Cousins), who correctly said that this problem is linked to the wider issue of the crisis within the banking system. I shall not digress widely into why the banks face a credit crunch, but we all know the essence of the problem: through very complicated financial instruments, debts, including bad debts from the sub-prime market, were bundled up and sold on in such a way that those bad debts can no longer be traced, as a result of which trust within the banking system has collapsed so that banks will no longer lend to each other, except at extreme rates, and the normal function of banking has broken down.
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