Boomers will say they had it worse in the 80s due to the interest rates they had then – but the actual situation for today’s homeowners is far tougher.

Interest rates at five per cent is not actually that high by historical standards.

In 2007 the base rate was 5.75 per cent and back in 1989 they were almost 15 per cent.

Anyone who bought their home in the 1980s and 1990s will tell you how much worse it was for them paying mortgages at rates three times what borrowers pay today.

But interest rates are tricksy – what matters is how much you’ve borrowed compared to how much you’re earning.

That ratio shows you how easy it is to afford to buy a home.

And that’s terrifying.

According to Schroders’ analysis, the average house in the UK currently costs around nine times average earnings.

The last time house prices were this expensive relative to average earnings was in the year 1876, nearly 150 years ago.

For so-called boomers – those people born in the aftermath of the Second World War – getting on the property ladder was not nearly as tough as it is now.

House prices in the mid-1990s were around four times average earnings.

Comment: Did the Bank of England do the right thing today?

By Sarah Davidson, Metro consumer champion

In short, yes. But it’s oh so much more complicated than that.

Let me attempt to get the economic interest rate inflation spaghetti even slightly untangled.

Hiking interest rates today was not really about bringing inflation down more quickly and it wasn’t about trying to “cause” a recession.

Or at least if that’s what it was trying to do, the entire Monetary Policy Committee has gone off their rockers.

We do not want a recession.

That really won’t help anyone at all, least of all voters (are you listening Mr Sunak?).

The reason the Bank upped the base rate from 4.5 per cent to 5 per cent – a steep hike by all accounts – was in a bid to tell the world that Britain’s not on slippery slope to basket case territory.

There have been a LOT of mistakes made over the past three years – by the Bank of England and by government.

First the Bank of England dawdled.

Then they didn’t listen to people with actual economics degrees.

And worst of all, they almost caused an even bigger mess than we’re in today.

The government had pumped hundreds of billions of pounds into the economy to get us through the pandemic.

But the most basic rule in economics is that the more money you put in, the more prices go up.

Ergo – inflation.

Blaming all of it on the Russian war in Ukraine, pandemic-related supply chain issues and then us – US! – for wanting to be paid more to cope with soaring prices, I just, words fail me.

There’s an excellent Glaswegian saying that just about sums up Bank of England governor Andrew Bailey’s proclivity for an excuse: “It wisnea me. A big boy did it and ran away.”

Bailey was being told more than two years ago to put up the base rate.

In February 2021 the base rate stood at 0.1 per cent and inflation at 0.4 per cent.

Qualified economists warned that monetary policy must start to tighten when people could afford it and before things got worse.

Policy wonks – of which Bailey is one I’m afraid – ignored them.

Slightly horrifying is that, according to Gerard Lyons, chief economic strategist at Net Wealth, Mr Bailey wrote to bank CEOs at the time informing them they must make their systems ready to cope with negative interest rates.

As far as a catalogue of errors goes, this one’s a cracker.

The Bank had to put up the base rate today and it had to go hard because if it didn’t markets would have battered us.

The FTSE 100 fell sharply this morning = markets TERRIFIED the Bank was going to do something stupid. Again.

Midday came, the rate rise was announced and markets began to tick back up after just five minutes.

Fine, you may be thinking, but I can’t pay my mortgage. So I really don’t care about markets.

Yeh, you have got a point.

Extremely worrying for me is that everyone, but everyone, has responded to this by saying that either the government must help borrowers who’ll struggle, or banks must.

Help is a nebulous concept at the best of times.

Government handouts were a mistake to tackle crippling energy bills, they would be a mistake for mortgage borrowers.

The Chancellor Jeremy Hunt and Prime Minister Rishi Sunak appear to have forgotten that they have an economic lever too.

The Bank of England uses monetary policy – its money printer (carrot) and interest rate (stick).

The Treasury has tax – fiscal policy – why isn’t this part of the ‘help’ debate?

Handouts are random, and inflationary.

We should be discussing how to tax the wealthiest more and “give” that back to the country’s lowest earners.

Just a thought – up the personal allowance dramatically for anyone earning less than minimum wage or claiming certain benefits and leave it frozen for everyone else.

The other call has been that “banks must help borrowers and show forbearance”.

What this means is borrowers move onto interest-only and stop paying the mortgage off, extend the term so that you pay less each month but more overall or taking a payment holiday, which is just a fluffy way of saying go into arrears with our permission.

How is any of this helping borrowers? It is categorically forcing borrowers to take on even MORE debt.

Thanks very much Mr Bank. So you get to make even more money out of me just so I can afford to avoid repossession?

Cheers.

If government and the banks really, truly want to help they would write off the extra interest incurred by the borrower by taking one of these options temporarily. They’d still be making billions.

Then again, the number of people with a mortgage is roughly the same as the number renting.

A third of those with mortgages are on variable rates – the majority with the option to sell and move somewhere they can afford.

Three times their number are currently being tossed out of their rented homes by landlords unable to afford their mortgages and are having to move down the living standard curve already.

Where’s their “help”?

The bottom line is that things are a mess. Life’s not fair. And it’s going to hurt.

At over eight times earnings today, the idea of getting onto the property ladder is a pipe dream for anyone without family money, generous parents or a seriously well paying job.

What’s the point of higher interest rates?

The theory is that higher rates dampen demand, which should take the heat out of inflation.

In plain English that means higher mortgage payments and higher rents as landlords pass on higher mortgage payments.

That means we have less money in our pockets to spend on anything else – hence demand for stuff drops.

Businesses have to compete harder and prices should come down.

Why did the Bank of England hike rates again?

The cost of living has gone through the roof because inflation is so high.

It was over 10 per cent since September last year and only fell back into single digits in April.

Markets thought inflation would fall again in May but it didn’t.

The overall measure of inflation known as the consumer price index didn’t budge from 8.7 per cent where it sat the month before.

But worse was that core inflation, which strips out energy, food, alcohol and tobacco, actually went up by 7.1 per cent – the highest it’s been since 1992, over three decades ago.

They’re hoping that hiking the Bank base rate from 4.5 per cent to 5 per cent today will bring down that core inflation.

There’s another reason they hiked rates

The Bank of England’s governor Andrew Bailey has been widely criticised for leaving base rate far too long for far too long.

That’s destroyed the Bank’s credibility with markets, which pushes up the cost of borrowing for banks.

That leaves borrowers paying even more on their mortgages when they move onto a variable rate.

In the US, the Federal Reserve – the Bank of England’s equivalent – held rates this month because markets trust that they have a grip on inflation.

Markets have no such faith in the Bank of England and so Bailey and his gang of economists are desperately hoping today’s rise will help to restore that trust.

Is it going to work?

Well, that’s the question. It hasn’t been working so far and that is probably because the mortgage market has changed radically since 1992.

Back in the day mortgages tended to track the Bank of England’s base rate so raising it had an immediate effect on how much people had to spend after covering the mortgage payments and other essential bills.

Now, the majority of mortgages are on two-year or five-year fixed rate deals so hiking the base rate isn’t going to affect millions of borrowers until those fixes end.

That means it will take up to five years for this to feed into our core inflation.

So it should work, but it’s going to be a long time coming.

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