Interest rates are rising, mortgage rates are multiplying, and in Britain at least, opinions are divided. Are mortgage holders suffering too much or not enough? Politicians worry about families squeezed by their repayments. The Bank of England, meanwhile, worries many homeowners are shielded by longer, fixed-term mortgages — so monetary policy cannot bring down inflation quickly.
“The truth is that the pain is rather badly distributed,” says Kate Barker, an economist who sat on the Bank’s Monetary Policy Committee between 2001 and 2010. “The people who will suffer the pain early are the ones whose mortgages happen to come to an end early. There’s also pain in the rental market.” It would be “illogical” for any government to stop this pain altogether — “otherwise there’d be no traction from monetary policy”.
Barker has been a vocal advocate for a more balanced housing policy since authoring an influential 2004 report that called for more new homes. She does not expect the rising interest rates to lead to a sharp fall in house prices, citing the spread of fixed mortgages, banks’ embrace of forbearance, and low unemployment.
Instead “the impact on house prices will be relatively muted”, with the number of sales remaining “rather low”. The prospects for first-time buyers may improve over the medium term, as low growth prevents house prices from bouncing back. “In the early 1990s, there was quite a long period where prices didn’t move very much. We may go into another period like that.” In such a scenario, house prices would rise a little in nominal terms, but would fall relative to earnings. “That would be a good result.”
Yet the broader picture is dispiriting. Britain has come to the end of more than a decade of low interest rates with precious little to show for it. The government did not borrow cheaply to build plentiful housing: its target of 300,000 new homes a year was never hit, and is now merely an “ambition”. Projects, from the HS2 rail network to insulating homes, will require decades of investment. Water companies have been told to find £56bn to reduce sewage overflows, just as their cost of capital increases.
“In hindsight, it was a big missed opportunity,” says Barker. “One of the difficulties was that, although now we know it was 10 years of low interest rates, in 2012 they didn’t. People thought that borrowing might become more expensive.”
When Barker left the MPC in 2010, she argued with the then governor Mervyn King over whether low interest rates and quantitative easing were enough to stimulate the economy. He thought they were; she had doubts. The assumption behind Bank of England independence was that the economy would go through “little cycles”, which the MPC could harness. “But when you get a really big shock, sometimes you have to say, shouldn’t [fiscal and monetary policies] all weigh in?
“We attributed too much power to monetary policy. You could argue that the same thing’s happening today. We’re asking monetary policy to do all the work.”
UK prime minister Rishi Sunak has pledged to halve inflation this year, but his strategy has been largely to let the BoE act. “We ought to be doing more of the work of driving out inflation by putting taxes up on the better-off.” Which taxes? “Income tax, and you could say it wasn’t forever.”
Tax rises might be politically unpalatable. But Barker’s time studying housing has made her familiar with identifying the UK’s inefficient shibboleths: the lack of capital gains tax on people’s primary homes, the distorting bands of stamp duty, the false “totem” of the greenbelt. “Sometimes you just have to keep on saying something that’s politically unpopular for a very long time — much longer than you think — before anybody picks it up.”
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Barker, 65, says she became an economist for two reasons: first, her O-levels coincided with the 1973 oil shock, and she wanted to understand what had happened; and second, she was desperate to move from her all-girls school to the mixed sixth-form college. “And they didn’t teach economics at the all-girls school.”
She worked for Ford for nine years, and liked the direct link between economic analysis and what happened in the car factories: “When we changed the forecasts, it changed things.” She was less happy lobbying at the CBI (“Are you allowed to say you worked at the CBI?”), where the connection to real economic changes was less clear.
She served on the boards of Yorkshire Building Society and housebuilder Taylor Wimpey. “I’ve been lucky because I was a woman at the right time, at a time when people wanted to employ women. You have to do a reasonable job when you’re there, but bluntly it opened doors for me.”
Her 2004 housing review, commissioned by Tony Blair’s government, led to some welcome efforts, including more new social housing. David Cameron then helpfully put in place a simplified national framework. However, his move to localise planning made it harder for things to be built. “We lost that ability to look at a map and say where in this quite large area does it make sense to expand.
“Supposing you’re a local authority today, and you’ve got a piece of farming land, and somebody says they want to put a solar farm there. How do you tackle that decision? How do you think about the trade-off between farming land and renewable energy? Local authorities were left without enough context [and] planning resource.”
According to analysis by the Resolution Foundation think-tank, the amount of built-up land per capita in the UK has actually fallen since 2000 — in contrast to most other rich countries, including Germany, France and the US.
Nimbyism remains a potent electoral force. Last year a revolt by Tory backbenchers torpedoed plans for housebuilding targets, centred on south-east England.
Barker, as a then member of the National Infrastructure Commission, backed the idea of building 1mn new homes in an arc between Oxford and Cambridge; that idea was discarded in 2022 by Boris Johnson, although it is being partly revived as a private initiative.
A perennial problem is the lack of joined-up planning. In the area around Cambridge, “the planning authority said it’s very difficult to build houses, because there isn’t any water. And that’s true: East Anglia is a very water-constrained place. Why isn’t there any water? Why hasn’t the water company perceived the fact that there’s going to be lots of houses in Cambridgeshire and provided for it?” Answer: because it takes a separate view of where houses might be built.
Nearly 13 per cent of England’s land is designated as greenbelt — an effort to stop urban sprawl, but which has meant many areas with transport connections cannot be developed. “The idea that it’s beautiful, untouched land is clearly wrong,” sighs Barker. “It’s just the bit of land round cities.”
Isn’t the problem that local authorities don’t yet have a direct enough financial stake in new houses being built, and nor do local people? Cash payments to existing residents would be one solution, yet Barker also disputes the premise. “The idea that you always lose when new housing is built is a bit of an odd one.” The town where she lives in Essex is the site of new housing. “It would be much less vibrant, if we hadn’t had as many people moving in. We wouldn’t have as many shops — all the things that actually made it quite a nice place to be in when Covid was on.”
“The idea that we always have to be perfectly compensated for everything can’t be right . . . People feel that they have a right for the place they live in not to change.”
Housing is only the most visible of the investments that Britain has resisted. “Clearly, as technology and population move on, to deal with climate change and worry about biodiversity, we’re going to have to make some really big changes — we’re going to persuade people that the consumption-type world is going to have to slow down a bit, and we’re going to have to make up some of this investment we missed.”
So the future is less spending on Amazon packages and meals out, and more on taxes and water bills? “Yes.”
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Last week Jim Ratcliffe, the billionaire founder of chemicals company Ineos, blamed Sunak for stoking inflation by handing out Covid furlough payments like “confetti”. Barker is more forgiving. In lockdown, policymakers were understandably worried about a possible “breakdown of the social order”.
How nervous would she feel if she were on the MPC now? “Would I feel nervous? Yes. When you’re on that committee, you’re always worried . . . It’s the price you pay for power.” Most of her period was marked by stable interest rates. “My son would say, what the heck are they paying you for, you haven’t done anything!”
In the current crisis it’s not “immediately clear” to her what mistakes the MPC has made. Some commentators argue that it should have raised rates sooner, just as it was criticised for not cutting rates quicker in the financial crisis. “In the big scheme of things, given the shocks on both occasions, whether you’d started a few months earlier, it’s really neither here nor there.”
After two decades of flat real wages, many Britons feel that they have earned a break. In fact, they are facing a slog. “We’ve ended up with an economy where we’re underinvested in lots of things in the public sector. You can only hope that this will be the moment when we’ll be able to achieve change. Whoever is in power for the next few years really does need to take some tough decisions.”
Barker is a sprightly figure, and seems determined to leave on an upbeat note. She speculates that capital investments and artificial intelligence might improve productivity. “It’s not all doom and gloom. We have a better educated workforce than we had in the past. We ought to be able to make better use of it.”
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