The shift in gear to a permanently lower inflation rate economy signalled by the ERM has exacerbated the housing crisis as it has robbed house buying of its speculative return as inflation hedge.
In tackling the debt overhang we can use the same approach as was used to tackle the Third World debt. We have to ease the current burden of repayment and allow more time to repay. A radical proposal in this respect would be to allow a moratorium on all mortgage repayments for one year. This will immediately release purchasing power in the economy to buy other consumer goods.
The interest not paid can be added on to the overall debt and the length of the mortgage extended so as to leave the monthly instalment the same upon resumption. The Exchequer will also gain from the mortgage interest relief not provided, a subsidy that currently costs around pounds 7bn.
There will be a reduction in the receipts of the building societies and banks. The Bank of England should be ready to supply the necessary liquidity for the short time necessary so as to prevent any rise in the mortgage rate due to the moratorium. As a helpful gesture the Treasury could allow the lending institutions to write off the interest cost of this forced borrowing against their tax liabilities.
The net cost of this proposal to the taxpayer will be small. It has the merit of encouraging new purchases since they, too, would enjoy the mortgage holiday.
All mortgages will still have to be repaid but in hopefully better times. In the meantime the economy can benefit from the extra spending.
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