June 16, 2023 - 7:00am

Mortgage rates in Britain are spiralling. HSBC is reportedly raising them for the second time in a week. The rises are occurring after recent economic data shows stubbornly high wage growth, which is now driving inflation in Britain. The wage-price spiral is very real and becoming a major threat to economic stability.

Unusually for an arcane financial topic, mortgage rates are becoming a hot button political issue. The current situation, at a micro- and macro-level, demands it. At a micro-level, many mortgage-holders are fearful that they cannot pay their bills, with mortgage costs accruing on top of the already high energy bills.

At a macro-level, the stability of the financial system is under threat from a wave of defaults. We are already seeing the commercial property bubble in the United States start to burst. Britain’s commercial property market — and probably its residential property market — are likely next. Property prices have become stretched in recent years, mainly due to reckless central bank monetary policy experiments. The chickens are coming home to roost — all at once.

The Punch and Judy show that is being generated by the politicisation of the mortgage rate issue is notable. Labour will not condone the unpopular strikes, but they will wink and nod at their union friends as they drive the economy into the ditch which in turn bolsters the party’s poll numbers. Rishi Sunak portrayed himself as a master financier and safe pair of hands who would return the country to economic stability after Lizz Truss — but clearly he has failed in this regard.

Labour attacks the Tories by saying that their economic strategy is a mess, as is their wont. But their economists have been denying the existence of a wage-price spiral for months. While Labour has not outwardly backed the strikes that are contributing to the problem, Starmer has recently indicated that his party would rescind the Sunak government’s anti-strike laws. This crypto-class warfare may make for good partisan politics, but it is destructive to the country because it renders the economy highly unstable and lets inflation run riot.

Rising above the tide, however, are some new voices on the political scene. Miriam Cates, MP for Penistone and Stockbridge, a leading figure on the new Right, has been doing the rounds discussing the deep structural problems that are contributing to Britain’s increasingly scary economic instability. On a recent BBC Politics Live show, Cates asked:

Why are mortgage rate rises such a big deal? Because house prices are so overinflated that they are unaffordable. And one of the reasons for that is because interest rates were so low for so long that people started investing in property rather than saving their money. Because property is now an asset, an investment rather than a home, even if you do increase supply, you just increase the supply of an investment asset. 
- Miriam Cates

Cates went on to argue that Britain has had deep structural economic problems since the 1980s which have been papered over with financialisation of the economy and rising levels of debt.

It is extremely refreshing to hear mortgage rate rises discussed in this context, even as they are being used cynically as a political football by others. But even if the Sunak government listened to Cates tomorrow, it is likely too late for the British property sector. It will sink with rising interest rates and drag the economy into recession. 

Perhaps, if we listen to politicians such as Cates, we will pay attention this time and look for actual solutions rather than sweeping the problem back under the rug. Cates proposes trying to rebalance the economy away from the financial sector and toward domestic manufacturing. This would not be easy, but it is necessary, and at least some figures are taking this problem seriously. The same cannot be said for our current crop of leaders.

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics