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Truss Is Squandering Thatcher’s Legacy With Homeowners

Many uncertainties swirl around the UK’s new crisis-ridden government — so many, indeed, that betting on whether it survives is keeping bookmakers busy. There can be no doubt about one thing, however. If Prime Minister Liz Truss can’t keep homeowners on side, her party is toast at the next election. 

As the world knows by now, the debt-juiced “new era” budget that Chancellor of the Exchequer Kwasi Kwarteng announced on Sept. 23 set markets ablaze and turbocharged the opposition Labour Party’s already healthy lead in the polls. Truss and Kwarteng initially seemed impervious to criticism; talk to the hand was the reigning sentiment. 

Then the penny dropped. By Monday morning, the unfunded top-rate tax cut that spooked markets had been scrapped. In the first week since Kwarteng’s budget, UK lenders pulled 40% of mortgage packages on the market so they could recalibrate offerings. “My mortgage went from 4.5% to 10.5%,” a first-time buyer told a BBC “Question Time” televised audience to audible gasps. 

Cue panic. As Truss was still defending her tax cuts at the start of the Conservative Party conference in Birmingham on Sunday, BBC host Laura Kuenssberg showed her a chart of soaring gilt yields, which feed through to rising interest rates. Truss tried to dismiss the scary graph by saying it didn’t show what people are paying, but the logic was so strained that even she didn’t sound convinced.

It’s hard to overstate how reliant the Tories are on the sucrose drip-feed of rising housing prices. Ever since Margaret Thatcher privatized council homes in the 1980s, the Conservative Party has fashioned itself as the champion of homeowners. A long period of low interest rates and steadily climbing property prices played to that core message, burnishing the Tories’ reputation as the party of the aspirational, despite stagnating real wages, sclerotic productivity and low growth.Tory constituencies (except a few super-wealthy parts of London) all have strong homeownership levels. Demand for larger properties surged during the pandemic as people began to work remotely and built up lockdown savings that could be put toward a down payment. As long as property prices were rising, people felt they were becoming richer. In the 2019 election, 57% of voters who owned their homes outright and 43% of those with mortgages voted Conservative (versus 22% and 33% for Labour).

While the vast majority of mortgage holders are on fixed-rate deals, most haven’t yet seen the effect of ascending interest rates. But more than a million homeowners — largely paying rates below 2.5% — will have to refinance next year at significantly higher rates at a time of rising energy costs and other expenses. Bloomberg Economics’ Niraj Shah estimated that the cost of servicing a two-year fixed-rate mortgage on an average priced home will rise to about £1,235 ($1,391.60) a month, from £725 in 2021.

The two-year swap rate, used to price a substantial portion of mortgages, has now slipped back to 5.1% from nearly 6% last week, Shah notes, but that’s still high compared with 1% at the start of the year. Though the government has cut stamp duty (a property tax paid by buyers), increased financing costs more than offsets that relief. That means demand is likely to decline, as some purchasers will have to pull out.

British households have also been taking on greater mortgage debt as a share of total income, making some more vulnerable to higher rates. As usual, the parts of the country that will feel the tightest squeeze are those most affected by the cost-of-living crisis generally. Lower-income households are more likely to have variable-rate loans as are younger homeowners under the age of 34, the Institute for Fiscal Studies reports.

Middle-class families and wealthier households who borrow more will feel the added costs, but much of that pain will be felt in the northern regions that abandoned the Labour Party — or, more accurately, Jeremy Corbyn — to vote Tory in 2019, but looks set to switch back. The IFS reckons that the fraction of the population contributing more than 20% of disposable household income for mortgage repayments could rise to 17% from about 11% currently, nearly the level reached in 2007-2008. 

None of this means Britain will suddenly see a rush of forced sales or tanking housing prices. For one thing, plenty of owners are still on low fixed-rate mortgages and a tight labor market means work is plentiful. Many households also amassed a substantial savings buffer during the pandemic as commuting and entertainment costs reduced. And as prices rose over the years, so did home equity. 

Still, this is a time of growing uncertainty for many homeowners and prospective buyers, creating maximum danger for a government that depends on their votes. 

The reality, of course, is that this bond was being tested even before Kwarteng’s budget. The era of quantitative easing had the effect of stoking asset prices like housing; but that was already coming to an end. Surging prices may have been good news for wealthier households who own their properties fully, but it meant that younger people have vanishingly small hopes of climbing onto the housing ladder. Indeed, those in rented accommodation, whether private or social housing, vote Labour over Tory by a large margin. 

For all their declared love of ownership, the Tories have been failing the very demographic needed to to help rejuvenate the party for the future — young people. A combination of planning restrictions, regulation in the industry and a lack of small- and medium-sized builders all increase costs, and block development means the government is nowhere near its manifesto pledge to construct 300,000 new homes a year by mid-decade. Kwarteng nodded to a plan to “promote housebuilding”  in his speech Monday, but those who’ve witnessed successive Tory governments promise and then abandon planning reforms are rightly skeptical. (Recall, Boris Johnson’s government scrapped its own planning reforms after Tory constituencies balked.)

Truss and Kwarteng are clearly correct to note that only economic growth and productivity gains, along with constructing more homes, can underpin an economy of owners. That the Tory conference’s “Get Britain Moving”  mantra comes as the era of low rates ends will strike many as a little too convenient from a party that has been in power for 12 years. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Therese Raphael is a columnist for Bloomberg Opinion covering health care and British politics. Previously, she was editorial page editor of the Wall Street Journal Europe.

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