Economic policymakers around the world are raising interest rates in an attempt to control the rising cost of living. Jerome Powell, the chairman of the Federal Reserve, reiterated his commitment to this policy in a speech yesterday. He warned against “premature” abandonment of inflation and promised to “stay the course until the job is done”.
But rising rates and high inflation can have very different practical effects depending on who you are and where you live. Gasoline prices matter a lot more for people who travel long distances to get to work, for example. Higher interest rates are costing people who rely on credit cards to pay their bills, when they may actually be good news for retirees living off their savings.
In today’s newsletter, I want to explore a stark example of these differences: the housing market on either side of the Atlantic. In Britain, rising rates threaten to force some people out of their homes. In the United States, in some cases they prevent people from moving.
Two countries, two results
At the start of this year, the typical American homebuyer could get a mortgage with an interest rate of just over 3%, a low rate by historical standards. Buyers today can expect to pay more than double in interest – more than 6.5% on average, the highest rate in more than a decade. Concretely, for someone buying a $300,000 house with a 20% down payment, it’s the difference between a monthly mortgage payment of $1,000 and a payment of more than $1,500.
If you own a home in the United States, chances are your monthly payment hasn’t increased at all. This is because a large majority of homes in this country are purchased with 30-year fixed rate mortgages. If you locked in a 3% rate last year, your monthly payment will stay the same for the next three decades, no matter what happens with interest rates, house prices, or overall inflation.
In Britain, mortgage rates have also risen rapidly. But the impact of higher rates looks very different. This is because most mortgages have fixed rates for only two to five years. (Others have variable-rate mortgages that automatically change whenever the Bank of England raises or lowers interest rates.) As my colleague Eshe Nelson recently reported, millions of Britons expect their interest rates rise over the next year. Inevitably, some of them will not be able to afford the resulting higher payments and will be forced to leave their homes.
Winners and losers
There’s no doubt that for most US homeowners, the stability offered by their fixed-rate mortgages is a huge advantage right now, effectively shielding them from the effects of high inflation and rising mortgage rates.
But not everyone comes out a winner. In the United States, you cannot take your mortgage with you when you move into a new home. As a result, homeowners who might have planned to move in the next few years – to trade in a bigger house, for example, or to downsize after the kids have gone to college – now have a strong incentive to stay put and hang on. at their low interest rate.
As a result, fewer people are putting their homes up for sale, keeping house prices high even as the housing market has slowed by other measures. This means that anyone hoping to buy a first home now faces a quadruple whammy: there aren’t many homes to buy. The houses available are expensive. Rising interest rates undermine buyer power. And if they don’t buy, they have to keep paying rent, which also goes up.
As Roman Sustek, an economist at Queen Mary University of London, told me: “In the United States, you’re going to have winners — those are the guys with existing loans — and you’re going to have losers, who are new borrowers. In the UK, everyone is going to be a loser.
These complex dynamics also have implications for the wider economy. The prevalence of fixed-rate mortgages in the United States means that the Fed can aggressively raise rates without worrying that millions of people will lose their homes. But it also mitigates the effect of these rate increases: if US homeowners were to face a sudden increase in their housing costs, they would be likely to withdraw their purchases to other regions (which is already starting to happen in Great Britain). Instead, many Americans may continue to spend, which could help keep inflation higher for longer.
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