After the easy money: a giant stress test for the financial system

John Plender in The FT 

Five weeks after the collapse of Silicon Valley Bank, there is no consensus on whether the ensuing financial stress in North America and Europe has run its course or is a foretaste of worse to come. 

Equally pressing is the question of whether, against the backdrop of still high inflation, central banks in advanced economies will soon row back from monetary tightening and pivot towards easing. 

These questions, which are of overwhelming importance for investors, savers and mortgage borrowers, are closely related. For if banks and other financial institutions face liquidity crises when inflation is substantially above the central banks’ target, usually of about 2 per cent, acute tension arises between their twin objectives of price stability and financial stability. In the case of the US Federal Reserve, the price stability objective also conflicts with the goal of maximum employment. 

The choices made by central banks will have a far-reaching impact on our personal finances. If inflation stays higher for longer, there will be further pain for those who have invested in supposedly safe bonds for their retirement. If the central banks fail to engineer a soft landing for the economy, investors in risk assets such as equities will be on the rack. And for homeowners looking to refinance their loans over the coming months, any further tightening by the Bank of England will feed into mortgage costs. 

The bubble bursts 

SVB, the 16th largest bank in the US, perfectly illustrates how the central banks’ inflation and financial stability objectives are potentially in conflict. It had been deluged with mainly uninsured deposits — deposits above the official $250,000 insurance ceiling — that far exceeded lending opportunities in its tech industry stamping ground. So it invested the money in medium and long-dated Treasury and agency securities. It did so without hedging against interest rate risk in what was the greatest bond market bubble in history. 

The very sharp rise in policy rates over the past year pricked the bubble, so depressing the value of long-dated bonds. This would not have been a problem if depositors retained confidence in the bank so that it could hold the securities to maturity. Yet, in practice, rich but nervous uninsured depositors worried that SVB was potentially insolvent if the securities were marked to market. 

 An inept speech by chief executive Greg Becker on March 9 quickly spread across the internet, causing a quarter of the bank’s deposit base to flee in less than a day and pushing SVB into forced sales of bonds at huge losses. The collapse of confidence soon extended to Signature Bank in New York, which was overextended in property and increasingly involved in crypto assets. Some 90 per cent of its deposits were uninsured, compared with 88 per cent at SVB. 

Fear spread to Europe, where failures of risk management and a series of scandals at Credit Suisse caused deposits to ebb away. The Swiss authorities quickly brokered a takeover by arch rival UBS, while in the UK the Bank of England secured a takeover of SVB’s troubled UK subsidiary by HSBC for £1. 

These banks do not appear to constitute a homogeneous group. Yet, in their different ways, they demonstrate how the long period of super-low interest rates since the great financial crisis of 2007-09 introduced fragilities into the financial system while creating asset bubbles. As Jon Danielsson and Charles Goodhart of the London School of Economics point out, the longer monetary policy stayed lax, the more systemic risk increased, along with a growing dependence on money creation and low rates. 

The ultimate consequence was to undermine financial stability. Putting that right would require an increase in the capital base of the banking system. Yet, as Danielsson and Goodhart indicate, increasing capital requirements when the economy is doing poorly, as it is now, is conducive to recession because it reduces banks’ lending capacity. So we are back to the policy tensions outlined earlier. 

Part of the problem of such protracted lax policy was that it bred complacency. Many banks that are now struggling with rising interest rates had assumed, like SVB, that interest rates would remain low indefinitely and that central banks would always come to the rescue. The Federal Deposit Insurance Corporation estimates that US banks’ unrealised losses on securities were $620bn at the end of 2022. 

A more direct consequence, noted by academics Raghuram Rajan and Viral Acharya, respectively former governor and deputy governor of the Reserve Bank of India, is that the central banks’ quantitative easing since the financial crisis, whereby they bought securities in bulk from the markets, drove an expansion of banks’ balance sheets and stuffed them with flighty uninsured deposits. 

Rajan and Acharya add that supervisors in the US did not subject all banks to the same level of scrutiny and stress testing that they applied to the largest institutions. So these differential standards may have caused a migration of risky commercial real estate loans from larger, better-capitalised banks to weakly capitalised small and midsized banks. There are grounds for thinking that this may be less of an issue in the UK, as we shall see. 

A further vulnerability in the system relates to the grotesque misallocation of capital arising not only from the bubble-creating propensity of lax monetary policy but from ultra-low interest rates keeping unprofitable “zombie” companies alive. The extra production capacity that this kept in place exerted downward pressure on prices. 

Today’s tighter policy, the most draconian tightening in four decades in the advanced economies with the notable exception of Japan, will wipe out much of the zombie population, thereby restricting supply and adding to inflationary impetus. Note that the total number of company insolvencies registered in the UK in 2022 was the highest since 2009 and 57 per cent higher than 2021. 

A system under strain  

In effect, the shift from quantitative easing to quantitative tightening and sharply increased interest rates has imposed a gigantic stress test on both the financial system and the wider economy. What makes the test especially stressful is the huge increase in debt that was encouraged by years of easy money. 

William White, former chief economist at the Bank for International Settlements and one of the few premier league economists to foresee the great financial crisis, says ultra easy money “encouraged people to take out debt to do dumb things”. The result is that the combined debt of households, companies and governments in relation to gross domestic product has risen to levels never before seen in peacetime. 

All this suggests a huge increase in the scope for accidents in the financial system. And while the upsets of the past few weeks have raised serious questions about the effectiveness of bank regulation and supervision, there is one respect in which the regulatory response to the great financial crisis has been highly effective. It has caused much traditional banking activity to migrate to the non-bank financial sector, including hedge funds, money market funds, pensions funds and other institutions that are much less transparent than the regulated banking sector and thus capable of springing nasty systemic surprises. 

An illustration of this came in the UK last September following the announcement by Liz Truss’s government of unfunded tax cuts in its “mini” Budget. It sparked a rapid and unprecedented increase in long-dated gilt yields and a consequent fall in prices. This exposed vulnerabilities in liability-driven investment funds in which many pension funds had invested in order to hedge interest rate risk and inflation risk. 

Such LDI funds invested in assets, mainly gilts and derivatives, that generated cash flows that were timed to match the incidence of pension outgoings. Much of the activity was fuelled by borrowing. 

UK defined-benefit pension funds, where pensions are related to final or career average pay, have a near-uniform commitment to liability matching. This led to overconcentration at the long end of both the fixed-interest and index-linked gilt market, thereby exacerbating the severe repricing in gilts after the announcement. There followed a savage spiral of collateral calls and forced gilt sales that destabilised a market at the core of the British financial system, posing a devastating risk to financial stability and the retirement savings of millions. 

This was not entirely unforeseen by the regulators, who had run stress tests to see whether the LDI funds could secure enough liquidity from their pension fund clients to meet margin calls in difficult circumstances. But they did not allow for such an extreme swing in gilt yields. 

Worried that this could lead to an unwarranted tightening of financing conditions and a reduction in the flow of credit to households and businesses, the BoE stepped in to the market with a temporary programme of gilt purchases. The purpose was to give LDI funds time to build their resilience and encourage stronger buffers to cope with future volatility in the gilts market. 

The intervention was highly successful in terms of stabilising the market. Yet, by expanding its balance sheet when it was committed to balance sheet shrinkage in the interest of normalising interest rates and curbing inflation, the BoE planted seeds of doubt in the minds of some market participants. Would financial stability always trump the central bank’s commitment to deliver on price stability? And what further dramatic repricing incidents could prompt dangerous systemic shocks? 

Inflation before all? 

The most obvious scope for sharp repricing relates to market expectations about inflation. In the short term, inflation is set to fall as global price pressures fall back and supply chain disruption is easing, especially now China continues to reopen after Covid-19 lockdowns. The BoE Monetary Policy Committee’s central projection is for consumer price inflation to fall from 9.7 per cent in the first quarter of 2023 to just under 4 per cent in the fourth quarter. 

The support offered by the Fed and other central banks to ailing financial institutions leaves room for a little more policy tightening and the strong possibility that this will pave the way for disinflation and recession. The point was underlined this week by the IMF, which warned that “the chances of a hard landing” for the global economy had risen sharply if high inflation persists. 

Yet, in addition to the question mark over central banks’ readiness to prioritise fighting inflation over financial stability, there are longer-run concerns about negative supply shocks that could keep upward pressure on inflation beyond current market expectations, according to White. For a start, Covid-19 and geopolitical friction are forcing companies to restructure supply lines, increasing resilience but reducing efficiency. The supply of workers has been hit by deaths and long Covid. 

White expects the production of fossil fuels and metals to suffer from recently low levels of investment, especially given the long lags in bringing new production on stream. He also argues that markets underestimate the inflationary impact of climate change and, most importantly, the global supply of workers is in sharp decline, pushing up wage costs everywhere. 

Where does the UK stand in all this? The resilience of the banking sector has been greatly strengthened since the financial crisis of 2007-08, with the loan-to-deposit ratios of big UK banks falling from 120 per cent in 2008 to 75 per cent in the fourth quarter of 2022. Much more of the UK banks’ bond portfolios are marked to market for regulatory and accounting purposes than in the US. 

The strength of sterling since the departure of the Truss government means the UK’s longstanding external balance sheet risk — its dependence on what former BoE governor Mark Carney called “the kindness of strangers” — has diminished somewhat. Yet huge uncertainties remain as interest rates look set to take one last upward step. 

Risks for borrowers and investors 

For mortgage borrowers, the picture is mixed. The BoE’s Financial Policy Committee estimates that half the UK’s 4mn owner-occupier mortgages will be exposed to rate rises in 2023. But, in its latest report in March, the BoE’s FPC says its worries about the affordability of mortgage payments have lessened because of falling energy prices and the better outlook for employment. 

The continuing high level of inflation is reducing the real value of mortgage debt. And, if financial stability concerns cause the BoE to stretch out the period over which it brings inflation back to its 2 per cent target, the real burden of debt will be further eroded. 

For investors, the possibility — I would say probability — that inflationary pressures are now greater than they have been for decades raises a red flag, at least over the medium and long term, for fixed-rate bonds. And, for private investors, index-linked bonds offer no protection unless held to maturity. 

That is a huge assumption given the unknown timing of mortality and the possibility of bills for care in old age that may require investments to be liquidated. Note that the return on index-linked gilts in 2022 was minus 38 per cent, according to consultants LCP. When fixed-rate bond yields rise and prices fall, index-linked yields are pulled up by the same powerful tide. 

Of course, in asset allocation there can be no absolute imperatives. It is worth recounting the experience in the 1970s of George Ross Goobey, founder of the so-called “cult of the equity” in the days when most pension funds invested exclusively in gilts. 

While running the Imperial Tobacco pension fund after the war he famously sold all the fund’s fixed-interest securities and invested exclusively in equities — with outstanding results. Yet, in 1974, he put a huge bet on “War Loan” when it was yielding 17 per cent and made a killing. If the price is right, even fixed-interest IOUs can be a bargain in a period of rip-roaring inflation. 

A final question raised by the banking stresses of recent weeks is whether it is ever worth investing in banks. In a recent FT Money article, Terry Smith, chief executive of Fundsmith and a former top-rated bank analyst, says not. He never invests in anything that requires leverage (or borrowing) to make an adequate return, as is true of banks. The returns in banking are poor, anyway. And, even when a bank is well run, it can be destroyed by a systemic panic. 

Smith adds that technology is supplanting traditional banking. And, he asks rhetorically, have you noticed that your local bank branch has become a PizzaExpress, in which role, by the way, it makes more money? 

 A salutary envoi to the tale of the latest spate of bank failures. 

Young Generations Are Now Poorer Than Their Parents And It's Changing Our Economies

 

Richard Wolff: The Crash IS Coming! What To Watch For

Most ingredients are in place for a property crash later this year

Rising unemployment is toxic for the property market and low interest rates may not be enough writes Larry Elliott in The Guardian 

 

Spring is usually the time when the property market comes out of hibernation. Photograph: lucemac/GuardianWitness


This weekend marks the start of a truncated summer house buying season, the moment the residential property market comes out of hibernation.

Normally this happens at Easter but, for obvious reasons, that has not been possible in 2020. Estate agents have been shuttered along with almost every other business, waiting impatiently for the lifting of the lockdown. This bank holiday weekend, with fine weather forecast, provides a chance to make up for lost time.

Well, perhaps. Britain’s love affair with rising house prices borders on the pathological so a mini boom can’t entirely be ruled out. The government did its best last week to give the market a boost by extending its mortgage holiday for the financially distressed for a further three months. That means those having trouble keeping up with their home loans won’t have to make a repayment until at least September.

That said, the notion that this is going to be a year of high turnover and rising house prices is wide of the mark. All the ingredients, bar one, is in place for a crash later in the year.  

Let’s start with the obvious: the economy has been poleaxed by the Covid-19 pandemic. The official jobless figures – showing a rise to 2.1 million in claimant count unemployment – provide only a hint of the damage that has been caused to the labour market by the lockdown. A truer picture comes from the number of jobs furloughed under the Treasury’s wage subsidy scheme, which stands at 8m and counting.

Not every one of those furloughed workers is going to end up jobless, but some of them will. The number will depend, crucially, on how long it takes for the economy to return to something like normal. The slower the process the more businesses will close permanently.

Rishi Sunak announced earlier this month that the furloughing scheme will be kept going until the end of October, but from the start of August employers will be asked to foot part of the wage bill themselves. At present, the government is paying 80% of wages up to a monthly maximum of £2,500, an expensive commitment that helps explain why the state borrowed almost as much in April (£62bn) as in the whole of the last financial year.

The chancellor will announce in the next few days how big a contribution employers will need to make, but at a minimum they can expect to pay 20% of an employee’s wages. This will be the moment of truth for many businesses.

Rising unemployment is toxic for the property market. If people struggle to find another job quickly after losing their job they fall into mortgage arrears and eventually have their homes repossessed. That happened in the early 1990s and is one reason why a mortgage holiday has been introduced this time.

Hansen Lu, property economist at Capital Economics, has shown how a moratorium on home loan payments saves someone paying 2.5% on a £200,000 mortgage £5,400 over a six-month period. That’s quite a financial cushion because although the lender eventually has to be paid back, it means subsequent mortgage payments go up by about £30 a month.

Again, everything depends on the state of the labour market this autumn. The mortgage holiday will end at the same time as the furlough scheme, and already there will be many households who will be wondering how they will manage at that point.

Buying a house is the single biggest financial commitment most of us ever make. When people are deciding whether to buy or not, they think hard about whether they are going to be able to keep up the monthly payments. It is not just being unemployed that matters; it is the threat of unemployment. Surveys suggest, hardly surprisingly, that consumers are extremely wary of committing to big-ticket items.

Only one thing is missing from a perfect storm: sharply rising interest rates. A doubling of official interest rates was the trigger for recession and record home repossessions in the early 1990s, but there is not the slightest prospect of that happening this time. The Bank of England has cut interest rates to 0.1% and is debating whether to take them negative.

There are economists – the monetarist Tim Congdon, for example – who believe that the vast quantities of money the Bank is chucking at the economy will eventually lead to much higher inflation. In those circumstances Threadneedle Street would have a choice: raise interest rates aggressively to hit the government’s 2% inflation target and guarantee deep recession in the process; or go easy. If it chooses the first option the housing market will collapse because many owner occupiers can only service the debts they have had to to incur to afford expensive real estate if interest rates remain at historically low levels.

So here’s how things stack up. On the one hand, the economy has collapsed and is recovering only falteringly; unemployment, whether real or hidden by the furlough, is rocketing; incomes are being squeezed; consumer confidence is at a low ebb; and the ratio of house prices to earnings is high. On the other hand, interest rates are low and will stay low for some time. In the jargon of the economics profession, there are more downside than upside risks.

But let me personalise things a bit. A relative for whom I hold power of attorney is about to have his house put on the market to fund his care home fees. My intention is to take the first halfway decent offer that’s received, because my sense is that prices are heading lower. In the past I haven’t heeded my own advice and lived to regret it. Not this time, though.

What would negative interest rates mean for mortgages and savings?

Hilary Osborne in The Guardian 

 

You will need to dig out your paperwork to see how low your mortgage rate could go. Photograph: Joe Giddens/PA


The governor of the Bank of England, Andrew Bailey, has paved the way for negative interest rates, saying officials are actively considering all options to prop up the economy.

The Bank’s base rate stands at 0.1%, the lowest level on record, so it would not take much to take it into negative territory. The UK would not be the first country to have a negative rate at its central bank – Japan and Sweden are among those that have done so.

What happens to my mortgage?

If it’s a fixed-rate mortgage, nothing. And most households are on this type of deal – in recent years around nine in 10 new mortgages have been taken on a fixed rate.

If it is a variable-rate mortgage – a tracker, or a mortgage on or linked to a lender’s standard variable rate – the rate could fall a little if the base rate is cut. But the drop is likely to be limited by terms and conditions. David Hollingworth, of the mortgage brokers London & Country, says trackers sold very recently have in some cases had a “collar” that prevents the lender from having to cut the rate at all. Skipton building society, for example, has a tracker at 1.29 percentage points above the base rate that can only go up.

Older mortgages often have a minimum rate specified in the small print. Nationwide building society, for example, will never reduce the rate it tracks below 0% – so if your mortgage is at base rate plus 1 percentage points, it will never fall below 1%. Santander specifies in some mortgages that the lowest rate it will ever charge is 0.0001%.

You will need to dig out your paperwork to see how low your mortgage rate could go.

Will new mortgages be free?

In Denmark, mortgages with negative interest rates went on sale last year. Borrowers with Jyske Bank were lent money at a rate of -0.5%, which meant the sum they owed fell each month by more than the sum they had repaid. There is no reason why UK lenders could not follow suit, although so far there is no sign that any will.

In the meantime, fixed-rate mortgages are getting cheaper and may continue to fall in price. Big lenders including HSBC and Barclays have reduced fixed-rates this week and more may follow. Hollingworth says borrowers now have a choice of five-year fixed rates below 1.5%, with HSBC’s deal now at 1.39%.

Tracker mortgages have been pulled and repriced with larger margins, to cushion lenders against falling rates. If rates are cut again, expect more of that, as well as the collars already seen on some deals.

A negative base rate means banks and building societies have to pay to keep money on deposit, and it is designed to discourage them from doing so and make them keen to lend.

Fears over what might happen to property prices mean they are still likely to lend very carefully, but they should not need to restrict the range and number of mortgages on offer. Some lenders that reduced their maximum mortgages while they were unable to do valuations have started to offer loans on smaller deposits, although the choice of 90% loans is very limited. “Lenders do have appetite to lend,” says Hollingworth.

What happens to my savings?

Savings rates have already been hit by the two base rate cuts in March and most easy-access accounts from high street banks are already paying just 0.1% in interest.

Andrew Hagger, the founder of the financial information website Moneycomms, says he thinks it is unlikely banks will start charging people to hold their everyday savings. “Many would just withdraw cash and possibly keep it in the house, thus opening a can of worms around security and break-ins,” he says. “However, if the Bank of England did introduce negative rates, I’m sure we would see even more savings accounts heading towards zero.”

Rachel Springall, from the data firm Moneyfacts, says: “The most flexible savings accounts could face further cuts should base rate move any lower or if savings providers decide they want to deter deposits.”

She is not ruling out a charge for deposits. “Some savings accounts could go down this path – similar to how some banks charge a fee on a current account,” she says.

Wealthy savers are likely to be the first who would face a charge. Last year UBS started charging its ultra-rich clients a fee for cash savings of more than €500,000 (£449,000), starting at 0.6% a year and rising to 0.75% on larger deposits. And at the Danish Jyske Bank, similar charges apply.

“It could be that super-rich clients in the UK get charged a similar fee as the commercial banks may wish to discourage large cash holdings which they are having to pay for,” says Hagger.

What about loans and credit cards?

Personal loan rates are already low and are usually fixed, so you will not see your monthly repayments fall if rates go down. Credit card rates are usually low for new customers, but rise far above the base rate once introductory periods have ended, so will not be anywhere close to falling into negative territory.

Hagger says he does not expect card or loan rates to plummet in the near future, “as I think banks will continue to tighten their credit underwriting – I think they’ll be more concerned about rising bad debt levels due to a surge in unemployment, for the remainder of 2020 at least.”

This month Virgin Money closed the credit card accounts of 32,000 borrowers after carrying out “routine affordability checks”. It later reversed the decision, but this could be a sign that lenders are reviewing their customer bases and trying to reduce their risk.

Soaring government debt is now inevitable. It’s nothing to fear

Thatcher’s simplistic aversion to borrowing still haunts fiscal policy, but interest rates have been falling for many years writes Philip Inman in The Guardian

 

Margaret Thatcher campaigning in the 1979 election. Photograph: Geoff Bruce/Getty Images


It is clear Boris Johnson has favoured his health advisers as he looks to ease the lockdown. Worries about a second coronavirus outbreak have clinched victory over concerns about keeping much of industry and commerce in a state of suspended animation.

After weeks of pleading by the Treasury to get the nation back to work, No 10 has opted to play it safe with people’s health, and particularly older people. And no wonder, after a hapless first few months in which the UK leapt to fourth place in probably the most ignominious league table in modern history – that of Covid-19 deaths per 100,000 population – behind Belgium, Spain and Italy.

---Also read

Can governments afford the debts they are piling up to stabilise economies?

Britain and Covid-19

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There are plenty of Tory MPs who believe there is a bigger threat to health, and possibly their electoral chances, from a damaged economy. They give equal billing to the threat from a flurry of corporate bankruptcies, a steep rise in unemployment and a ballooning debt pile that would dwarf the legacy left by the 2008 banking crash.

And it is this last concern – that of the mortgage to end all mortgages being left on the nation’s balance sheet – to which ministers have turned and begun to debate in the most heated terms. Without a doubt, a fear of debt is the main constraint on funding the current rescue operation and on making a boost to investment once the crisis is over.

If you are a traditional Conservative MP with a picture of Margaret Thatcher on the constituency office wall, you believe debts must be repaid, much like a domestic property mortgage.

This is the household analogy Thatcher used to great effect during her years as prime minister, despite it being economically illiterate, and only ever deployed as a way to keep public spending in check and state power limited.

Now, to tackle the coronavirus outbreak and nurse the economy until a vaccine is mass-produced, there is no choice but to watch the gap between spending and income soar.
The Institute for Fiscal Studies estimates the government will need to borrow an extra £200bn in this financial year alone and is heading for a debt-to-GDP ratio of 95% from the current level of around 83%.

A debt mountain that falls just short of the UK’s £2.2 trillion annual income is a level of borrowing that butts up against a significant psychological barrier – the three-figure debt-to-GDP ratio.

In the mind of a conservative thinker, only countries that are reckless, and possibly morally dubious, have spent so much that their debts exceed 100% of GDP.

In practical terms, a country with high debt levels can become the target of panicky investors, who can orchestrate a strike that means no one lends it money.

A government borrows by issuing bonds with a maturity date, and it needs fresh lenders to step in and buy the debt from existing lenders each time it matures. “Bond vigilantes” make money from orchestrating such bond-buying strikes and are ever watchful for countries that have left themselves vulnerable.  

The euro crisis is still fresh in many people’s minds, when Italy and Greece found themselves bond-market pariahs. Italy’s debts equalled 130% of GDP. Greece found itself with a debt-to-GDP ratio of 180%.

George Osborne’s career as chancellor, and his adherence to a debilitating austerity programme, was built on warnings that Britain could suffer the same fate as Greece and Italy. Like his hero Thatcher, he persuaded an anxious nation that debt was to be feared.

Yet it was never true and is even less true today. Central to this argument is the path of interest rates. For the last 20 years in the UK and Europe, and the last 40 years in the US, interest rates on government debt have tumbled. Even though governments have borrowed more over time, the cost of financing each pound of debt has fallen.

There was always the concern that interest rates could increase at some time, but it was never likely and most economists agree it cannot happen now, at least not for a decade or more. There are too many savings in the world looking for a safe haven for the demand for government bonds ever to fall, especially relative to stock markets or lending to corporations. That means the bond vigilantes have no leverage, except in the developing world. For the richer countries, there is always someone to borrow from.

So, as the US and Japan have learned, it is not the size of your debts but how much they cost to service that matters. No wonder the US government debt-to-GDP ratio is at 110% and rising while Japan is a darling of the bond markets even though its government has a debt-to-GDP ratio above 250%.

My year of no spending is over – here's how I got through it

Michelle McGagh in The Guardian


Just over 12 months ago I gave myself a challenge: give up spending on all but the essentials for a whole year. I started on Friday 27 November, just as many other people were hitting the shops. It hasn’t always been easy, but a year on I am wealthier and wiser. Embarrassingly, I have also realised just how much money I’ve squandered down the pub, in restaurants and through mindless shopping.

The challenge

As a personal finance journalist people assumed I was good with money but while I wrote a lot about the merits of saving, I wasn’t practising what I preached. I figured that because I earned a good wage, didn’t have any credit card debt and my bank account was in the black, I didn’t need to worry about how much money was leaving my account.

I was spending without thinking, lured in by advertising and the promise that I could spend my way to happiness. I was stuck in a cycle of consumerism – earning money to buy stuff I didn’t really need, which wasn’t making me happy.

Giving up spending for a year was an extreme approach, but the aim was to embrace extreme frugality, shake up my spending habits and overpay my mortgage instead of shopping. I could continue to pay my bills, including mortgages, utilities, broadband, phone bill, charity donations, life insurances, money to help my family and basic groceries.

I’ve learned to shop for food in a better way than I did before – I have planned meals, batch-cooked and improved my dire cooking skills slightly. My husband agreed to do the grocery part of the challenge with me this year and we reduced our weekly shop (which covered three meals each a day, toiletries and house cleaning products) to £31.60 a week.

 

Michelle McGagh’s cycle became her best friend.



Finding a new way to live

There were two instances in the last year when I had to put my hand in my pocket. The first was on a cycling holiday when I spent £1.95 on a bag of chips because there was nothing to eat in the only local shop except for pork pies. The second was when my next door neighbour – who didn’t know I was on a no-spending challenge – had given a roofer the OK to fix a missing tile between our terrace house and his. The work had already been done and the roofer paid. It cost £100 and we owed him £50 so I paid up. I’m not too upset by the fact I’ve paid out £51.95 all year.

I’m not going to pretend it was easy, especially in the first few months when I tried to live my old life without money and found it wasn’t working. There were plenty of times I wanted to abandon it and indulge in some retail therapy, buy a pint in the pub, or even just purchase a bus ticket instead of getting on my bike for another journey.

But I realised I just had to find new ways to have fun that didn’t include putting my hand in my pocket and defaulting to the pub. Using sites such as Eventbrite I have been to film screenings, wine tasting evenings and theatre productions for free. I’ve also used SRO Audiences to see comedy shows and TV programmes being filmed, and none of it cost me anything.

Living in London I have a wealth of free cultural activities on my doorstep and I’ve been to more art exhibitions this year than ever before – my favourite being First Thursdays, where 150 galleries in east London open late and hold private views and talks.

I even managed a free holiday, cycling the Suffolk and Norfolk coast and camping on beaches. It’s something I’d never done before and probably wouldn’t have, were it not for the challenge – and now I can’t wait to go again next year.

I would like thank those who engaged with me on social media to say they were enforcing their own spending bans

There were lows, such as when I missed gigs and blockbuster films. And I’ve not been able to join friends when they have gone out for a nice meal. There have also been some awkward moments when I’ve turned up to a friend’s house for dinner empty-handed because I couldn’t buy a bottle of wine as a thank you. I did a lot of washing up at my friends’ houses this year as a way of saying thanks for feeding me.

The savings

After my expenses were met, I started overpaying my mortgage. We also took in a lodger, and my savings and their rent have helped us pay off an extra 10% of our loan.

Paying off a large chunk of the mortgage has made me realise that I don’t have to stay indebted to the bank for another 25 years like it wants me to and that I have an option to pay it off earlier. By getting rid of my mortgage faster I not only cut the amount of time I spend paying it off but also the interest I pay to the bank.

I’m grateful to have disposable income to save and feel I should make the most of it – I hope I have encouraged other people to reconsider their spending patterns too. I would like to say thank you to those who engaged with me on social media to say they were enforcing their own spending bans whether on clothes or a month-long ban – they all helped me keep my resolve.

That’s not to say that everyone was happy about my experiment, with some accusing me of poverty tourism, but there is a big difference between poverty and frugality. This experiment was not about living in poverty because poverty isn’t a choice. I could still pay my mortgage, bills and food. The last year has been an experiment in extreme frugality and choosing not to buy, rather than not having a choice.

 

Michelle McGagh’s jeans have seen better days

Despite the awkward moments and missing out, this year has been the shove I needed to try new things. The best thing about the challenge is that I’ve been willing to say ‘yes’ more and that I’ve become more adventurous.Having the choice to spend, or not, is a privilege and I have become far more aware of why we buy. I have come to realise that consumerism keeps us chained to our desks, working to earn money to spend on stuff we think will make our lives better. And when the stuff doesn’t make us happy, we go back to work to earn more money to buy something else. The last 12 months have allowed me to step outside this cycle and I can honestly say I’m happier now. I’ve gained confidence and skills, done things I would never have done and met lovely people I wouldn’t have otherwise met.

Many people have said to me, “I bet you can’t wait to get down the shops and have a splurge”, but in all honesty, I’m not interested in hitting the shops. There are a few practical items I need to replace, such as jeans and trainers, and my bike could do with a decent service but that’s about it. I have one more day of no spending to get through and after that there are just two things I will be buying this weekend: a round of drinks for my friends and family to say thanks for their support, followed by a flight to see my grandad in Ireland.

A year of no spending has taught me what things I really need, and it really isn’t that much.

Five things I really missed


There were lots of big events and nights out I expected to miss out on, but there were some small, more everyday items that I hadn’t expected to miss quite so much.
Decent curry: I’m not the best cook and my home-made curries just can’t compete with my local takeaway.

Fresh flowers: I realised how much I’d missed flowers at home when I was sent a bunch for my birthday – they brightened my home and my mood.

Moisturiser: this didn’t make it on to the “essentials” list, which was probably a mistake judging by my wind-whipped face.

Perfume: my Lidl deodorant stood up to the test of cycling everywhere but a spritz of perfume may have helped me feel a bit more human and less of a sweaty mess.

The bus: while I love cycling, not being able to get on the bus in the cold and rain could be trying; taking the bus, especially to meetings where I had to look smart, would have been a big plus.

The housing crisis is creating sharp-elbowed husband hunters

Grace Dent in The Independent

“It is a truth universally acknowledged,” wrote Jane Austen, foretelling the British housing situation in 2016, “that a single man in possession of a good fortune must be in need of a wife.” Oh how I struggled, as a sixth-former in the Nineties, with the opening lines of Pride and Prejudice.

How hideous, I thought, that a time existed when a woman would marry a man for a house. Cut forward some two decades to the era of the £80,000 mortgage deposit. How odd that marrying bricks and mortar – with an added spouse as a bonus – seems pragmatic, rather than mercenary, today.

I very much enjoyed a recent column by the writer Esther Walker, in which she admits spying her then-boyfriend Giles Coren’s slightly neglected five-bedroom London townhouse, seven years ago, and being instantly smitten. With the house, that is. Coren, as alluring as he is, came second in the equation. First, Walker says, she saw the chipped front door, the replaceable carpets and all that lovely space. Here was a home in which she could live, nest, and raise children.

It is fascinating to me that, five short years ago, a confession as gloriously candid as Walker’s would have provoked feminists into bringing down the internet. I would have been among them, perhaps. Today, I greet the same news with a relaxed shrug of acceptance.

Just five short years ago, I remained convinced that if a young woman – or a young man, for that matter – dreamed audaciously and worked very, very hard, they need not be dependent on anyone for a home. I bought my own house through sheer slog and bloody-mindedness; why couldn’t Generation Buzzfeed do the same? 

But little by little, I’ve watched the rise of single men and women trapped in later-life house-shares. I’ve seen how grown-up children are reduced to squatting like cuckoos in their parents’ back bedrooms until well after it is polite. Eventually, I was writing about the rise of strangers in London sharing bunkbeds (out of grim necessity, I should point out, not as a niche hobby).

The future seemed rather infantalising. And for women, feminism may well have flourished, but owning the house you live in, like Beyoncé sang about in “Independent Women” has fallen on its arse somewhat.

The facts are sobering: recent research by the Resolution Foundation on inter-generational fairness shows that in 1998, more than half of those earning 10 to 50 per cent of the average national income had a mortgage. This figure dropped to one in four by 2015. Within a decade, if things continue as they are, one in 10 will have a mortgage. In the late 1990s, when I was a strident youthful thing, it took determined people like me three years to save up for a deposit. Today it would take 22 years. That’s a long time to share a bunk bed, even if it’s in HMP Holloway.

This is particularly bleak in the light of new research on the rise of the “crowd worker” – people paid through online platforms such as Uber, Upwork and TaskRabbit. Here, instead of fairly paid, pensionable work which impresses mortgage vendors, there is a generation tied to their phones waiting to accept or decline piecemeal “tasks”.

Crowdworkers tend to work without benefits such as sick pay, holiday pay, pension contributions or minimum wage guarantees. There must – I suspect, as I’ve never worked like this myself – be a feeling for crowdworkers of being tremendously busy and usefully employed. But meanwhile, financially at least, they are treading water. I’m not sure how you conduct a family life or a relationship around crowdwork, although I’m pretty sure the people who profit from it will say that it’s this versatility that is the unique selling point.

One thing I do know is that Walker’s confession unveils an unpalatable truth about the modern British relationship. We are, increasingly, a nation of clandestine Austen heroines in search of those “in possession of a good fortune”. Be you feminist or fervent bachelor, gay, straight, male, cis or genderfluid; for the average person, marrying into property will be your best shot at “owning it” these days. And if you can charm your name on to the mortgage deeds, well, even better. The housing crisis will make sharp-elbowed, radar-eyed Chelsea husband-hunters of all of us.

In another five years, I predict that Tinder will be outmoded by a simple database of single millennials who were lucky enough to inherit – or afford – a three-bedroom house with space for a homeworking office and a nursery. Or an app which lists unwedded people with sickly parents about to cark it who, in the meantime, happen to be sitting selfishly on a five-bedroom pile in Surrey. In the future, these property owners – not the slinky, the booby or the muscular – will be the sex gods of society.
These gods will woo you with their seductive talk of land registry documents, convertable attic space and the downsides of a 20-metre back garden. You will be powerless in the face of their Farrow & Ball catalogue and hopelessly impressed that their bed is on one level and not accessed via a ladder. You will swipe right for a place to call home. Sure, deep, real love will keep you warm in bed at night. But when the place is yours, you can stick in underfloor heating and a reliable combi-boiler.

Death of buy-to-let: landlords wake up to Osborne's 150pc tax

Richard Dyson in The Telegraph

Hundreds of thousands of landlords and their accountants are digesting the impact of George Osborne’s shock tax change unveiled in the summer Budget on July 8.

The tax increase, on which there was no consultation, will be phased in from 2017 and fully implemented by 2020.

The change was unexpected, and the new regime is highly complex, so investors and their tax advisers are only now fully grasping its effects. Many investors remain unaware of the change, or underestimate its severity.

All higher-rate taxpayers who own buy‑to‑let properties on which there is a large mortgage will pay substantially more tax. Some current basic-rate taxpayers will also be hit, because the change will push them into the higher-rate tax bracket.

Those who are worst affected will see:

● the actual tax they pay on their investment rising twofold or more;

● the tax rate payable rising above 100pc, meaning that more than all of their profit is paid in tax;

● a degree of tax that pushes them into loss, making their investment financially unviable and forcing them to increase rents sharply – or sell.

Scroll down for a worked explanation of the changes.

What is also becoming clear is that worst hit will be those modest, middle-class savers who have prudently chosen to invest in buy‑to‑let, often alongside pensions and Isas, as a means to supplement their income.

The mechanism of Mr Osborne’s tax attack is the removal of landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.

So very wealthy landlords who do not need mortgages are untouched.

• Comment: This Alice in Wonderland tax sets a new benchmark in financial absurdity

In effect, the Chancellor wants to tax landlords on their turnover rather than their profit, meaning that tax will be payable on nonexistent income. This explains why tax rates will, for some, exceed 100pc: landlords will have to pay all of their profit in tax, and then pay more tax still.

As landlords absorb news of this shock tax attack, many have turned to online forums to vent their dismay. Some are writing to their MPs and directly to Mr Osborne.

More than 14,000 have signed an online petition calling for the tax to be withdrawn.

Other buy-to-let investors, though, remain unaware of the tax bombshell poised to wreak havoc on their finances. Accountants, mortgage lenders, brokers and other professionals are themselves still working through the ramifications.

Tina Riches, tax partner at accountancy and investment firm Smith & Williamson, said: “We are contacting all of our clients who have mortgaged property which they let, and we want to speak one-to-one with those worst affected. It is going to have a significant impact.”

Smith & Williamson has calculated that any higher-rate taxpayer landlord whose mortgage interest is 75pc or more of their rental income, net of other expenses, will see all of their returns wiped out by 2020.

So mortgage costs above 75pc of rental income will mean the buy‑to‑let investments become loss-making.

For additional-rate (45pc) taxpayers, the threshold at which their investment returns are wiped out by the tax is when mortgage costs reach 68pc of rental income.

The investors worst affected are therefore likely to be those who have bought recently with large mortgages. Low-yielding properties, such as those in London and other parts of the South East, where rents are comparatively low relative to property prices, will also be exposed. That is because rental income is likely to be lower relative to investors’ mortgage costs.

“It will be very difficult for middle-income borrowers to get into buy‑to‑let in future,” Ms Riches said. “It won’t end overnight, but existing investors will sell and far fewer will buy. Buy‑to‑let may well waste away.

“The wider worry is that the Government can make such radical changes without any consultation. What other areas will come under attack?”

Connie Cheuk owns 5 Properties - Photographed at her home in Littlehampton. Photo: Philip Hollis

Read how Connie Cheuk (pictured above), a landlord with five properties, will see her tax bill rise by almost 40pc. She is even contemplating giving up her 18-year career as a teacher as a means of reducing the tax impact

Britain’s big mortgage banks are reluctant to comment and appear to want to downplay the impact, perhaps to reassure their shareholders. But a senior executive at a top-five buy‑to‑let lender admitted privately to Telegraph Money: “For a group of customers there is a challenge, a potential for their cashflow to turn negative. They will be loss-making. Overall, this move makes it substantially harder for investors to generate a net income from buy‑to‑let.”

Of the many landlords to contact us, several are considering selling. This would enable them to pay off mortgages and limit the tax damage. Others will evict tenants and refurbish properties so they can be re-let for more.

One landlord described how a property currently let to a single mother of four, who is on benefits, will “not wash its face” once the tax starts to bite. If he converted the property into two units he could increase the current rent to cover the tax. The council would have to rehouse the family, he said, “and there is already an acute shortage of housing in that area”.

Another landlord described a £110,000 property, on which there is a £68,000 mortgage, let to an elderly couple at “about two thirds of the going market rent”. It generates an annual £1,100 profit, which would fall to £370 after the tax change.

“The property needs a new boiler, which would wipe out profits for years,” the landlord said. “My options are to increase rent significantly, which the tenants can’t afford, or evict them and sell up, or convert the property into smaller units.

“The Chancellor doesn’t grasp the misery he’ll cause – or doesn’t care.”

When George Osborne announced the change, he implied that the extra tax would hit only higher-earning landlords.

It’s true that every mortgaged landlord who pays 40pc or 45pc tax will indeed pay much more under his proposals.

But some basic-rate taxpayers will also pay more tax – because the change will push them into the higher-rate bracket.

In fact, contrary to Mr Osborne’s suggestion, the only buy-to-let investors who will not be hit are the very wealthy who buy property in cash and who don’t need a mortgage.

At the heart of the change is landlords’ future inability to deduct the cost of their mortgage interest from their rental income.

In other words, tax will be applied to the rent received – rather than what is left of the rent after the mortgage interest has been paid.

Here is a worked example assuming you, the landlord, pay 40pc tax.


NOW

Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.


2020

Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.

Now, say Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.

You will have to pay £5,000 tax in this scenario, so you make no profit at all.

Every man, woman and child in Britain is more than £3,400 in debt – without knowing it and without borrowing a single penny

Jonathan Owen in The Independent

Every man, woman and child in Britain is more than £3,400 in debt – without knowing it and without borrowing a single penny – thanks to the proliferation of controversial deals used to pay for infrastructure such as schools and hospitals.

The UK owes more than £222bn to banks and businesses as a result of Private Finance Initiatives (PFIs) – “buy now, pay later” agreements between the government and private companies on major projects. The startling figure – described by experts as a “financial disaster” – has been calculated as part of an Independent on Sunday analysis of Treasury data on more than 720 PFIs. The analysis has been verified by the National Audit Office (NAO).

The headline debt is based on “unitary charges” which start this month and will continue for 35 years. They include fees for services rendered, such as maintenance and cleaning, as well as the repayment of loans underwritten by banks and investment companies.

The situation is expected to worsen as PFI projects spread across the world (Getty)

Basically, a PFI is like a mortgage that the government takes out on behalf of the public. The average annual cost of meeting the terms of the UK’s PFI contracts will be more than £10bn over the next decade.

And the cost of servicing PFIs is growing. Last year, it rose by £5bn. It could rise further, with inflation. The upward creep is the price taxpayers’ pay for a financing system which allows private firms to profit from investing in infrastructure.

An NAO briefing, released last month, says: “In the short term using private finance will reduce reported public spending and government debt figures.” But, longer term, “additional public spending will be required to repay the debt and interest of the original investment”.

A case in point is Britain’s biggest health trust, Barts Health NHS Trust in London, which was placed in special measures last month. It is £93m in debt – struggling under the weight of a 43-year PFI contract under which it will pay back more than £7bn on contracts valued at a fraction of that sum (£1.1bn).

PFI’s were the brainchild of the Conservative Party in the 1990s, but were swiftly embraced by New Labour. Successive governments signed hundreds of the deals. PFI-funded schools, streetlights, prisons, services, police stations and care homes can be found across Britain.

The system has yielded assets valued at £56.5bn. But Britain will pay more than five times that amount under the terms of the PFIs used to create them, and in some cases be left with nothing to show for it, because the PFI agreed to is effectively a leasing agreement. Some £88bn has already been spent, and even if the projected cost between now and 2049/50 does not change, the total PFI bill will be in excess of £310bn. This is more than four times the budget deficit used to justify austerity cuts to government budgets and local services.

Gateway Surgical Centre, London, is run by Barts Health NHS Trust, which is struggling under a £7bn PFI (Alamy)

Responding to the findings, TUC General Secretary Frances O’Grady said: “Crippling PFI debts are exacerbating the funding crisis across our public services, most obviously in our National Health Service.”

According to Jean Shaoul, professor emerita at Manchester Business School, PFIs have been “an enormous financial disaster in terms of cost”. She added: “Frankly, it’s very corrupt... no rational government, looking at the interests of the citizenry as a whole, would do this.”

Unlike government funding, PFI’s cannot be adjusted to match the economy’s fortunes. They are governed by contracts that often run to thousands of pages. In contrast to the radical cuts to public spending, less than 1 per cent has been trimmed from the total cost of PFI deals since 2012.

Danny Alexander, Chief Secretary to the Treasury, admitted last month: “Too many of the old PFI deals were poorly negotiated... with high costs draining local and national coffers.”

PFI contracts could escalate like America’s subprime mortgage fiasco (Getty)

Last year The Independent revealed how firms given 25-year contracts to build and maintain schools doubled their money by selling their shares in the schemes less than five years into the deals. Four – Balfour Beatty, Carillion, Interserve, and Kier – made combined profits of over £300m.

Repeated concerns over projects suffering years of delays and soaring costs have been raised in Parliament in recent years, chiefly via the Public Accounts Select Committee. Its chair, Margaret Hodge, has spoken of Labour’s promotion of the deals during its time in power: “I’m afraid we got it wrong... we got seduced by PFI.”

Allyson Pollock, professor of public health research and policy, Queen Mary University of London, said the diversion of funds from other budgets to PFI payments make the schemes “an engine for closure of public services and further privatisation”.

Margaret Thatcher began Britain's obsession with property. It's time to end it

Right to buy helped to turn the UK into a nation that saw houses as something to make money from, not to live in. Now we are at crisis point – and the government must step in 

• 
• • Rowan Moore
  • The Observer, Sunday 6 April 2014

Margaret Thatcher takes tea with former GLC council house tenants in Balham in 1978. Photograph: Kenneth Saunders for the Guardian

In 1975, in her first speech as leader to the Conservative party conference, Margaret Thatcher declared her belief in a "property-owning democracy". She didn't invent the phrase – the 1920s Tory MP Noel Skelton should take the credit for that, and the American liberal philosopher John Rawls picked it up before she did – but it became the most distinctive of all her many distinctive ideas, the one that most succinctly describes the Britain she wanted to create.

Through thrift and hard work, went the theory, ordinary families should be able to buy their own homes. It would give them security, dignity and freedom and liberate them from the nannying of local council landlords. It would make them better citizens, with their own stake in the economic wellbeing of the country, they would have an incentive to contribute to national prosperity. It exemplified her belief that capitalism was good not only for the rich, but for people on modest incomes. As the then environment secretary, Michael Heseltine, put it later: "Home ownership stimulates the attitudes of independence and self-reliance that are the bedrock of a free society."

So Thatcher allowed council tenants to buy their own homes at reduced prices, and sincethe right to buy was introduced, about 1.5m have been bought. She presided over an economy in which house buying became a national obsession and home ownership went up from 9.7m to 12.8m. Fundamental to her idea was that government, which had built between a third and a half of all homes for the previous three decades, should step back. Councils could no longer build council housing. The market would provide. Houses would be built by housebuilders, to use the standard term for the companies that buy land, win planning permission and then (sometimes) put homes on it.

Thatcher's idea is now at a point of crisis. Housebuilders are not building enough houses, and the proportion of people owning their own homes has been falling since 2007. People have long ago found that it does not always make you free to be shackled to a mortgage, still less if you cannot cross the increasingly high threshold into ownership. In London and the south-east, businesses lament the effects on them of expensive housing caused by the lack of mobility of potential workers.

Debt and speculation have been encouraged more than thrift and people who only wanted a home were forced to be gamblers in a turbulent market. The property-owning democracy is not turning out to be democratic, excluding as it does the large minority who don't own homes. In a sick practical joke, people have been encouraged to take on long-term mortgages at the same time that secure lifetime employment, which might pay for them, is disappearing. As for public spirit, with rising house prices goes rising nimbyism, as owners seek to protect their investment from all possible threats, above all the threat of more homes being built nearby that other people might live in.

Over three decades, a culture has been created in which the price of homes colours almost every aspect of life. It affects people's decisions about whether and when to live together, stay together and have children. An economy has been created in which inflation, otherwise frowned upon, is desirable in house prices, even essential. Property values are used as the principal tool of urban regeneration and, when those values fail to materialise, so does the regeneration. The infamous bedroom tax regards a few square metres of spare space as such a great asset that it must be wrenched from the grasp of the undeserving poor. "Values", indeed, is a telling word – we use it more to describe property than anything to do with ethical or social ideals.

It is amazing, beyond satire, that the two biggest stories in housing are on the one hand the bedroom tax and on the other the streets and squares of empty houses in Belgravia and Kensington, bought as investments by owners who rarely visit. At the same time that, when it comes to poor people, vacant rooms are deemed an offence to be expunged, they grow unchecked in the most desirable parts of London.

At almost every level, the market isn't working, from ex-industrial towns in northern England, where the values are too low to justify repairs to existing houses, to the under-supply and high prices in London, where an average home now costs £458,000, or 13 times the median full-time income. Hidden favelas are growing up in suburbs such as Newham and Southall, with unauthorised developments in back gardens and flats occupied at many times the levels for which they were designed.

 Newham, London: favela-style housing is on the increase in suburbs such as Newham and Southall, with severe overcrowding and unauthorised developments in back gardens and yards. Photograph: Newham Council/Archant

A system has been created with a few winners, for sure, but not the people excluded from the market, nor those barely able to pay for their homes, some of whom will drown when interest rates start going up. Even those who bought early enough to have a profit on their home find it to be largely nominal, impossible to realise without removing themselves or their children from the all-important property ladder.

Not even housebuilders are entirely happy, although recent government policies such as Help to Buy and the encouragement of easy credit have helped their share prices rise. They grumble that planning restrictions and regulations make their work unreasonably difficult and that the margins in their business are low. "It is a fantastically hard business," says one of those involved, because of its booms and busts. The most obvious winners were people such as Judith and Fergus Wilson, the Kent-based buy-to-let magnates said to be worth £180m. But here too there are losers – the people who got their fingers burned when this particular market crashed.

As Danny Dorling, in his recent book All That is Solid: The Great Housing Disaster has pointed out, the home is now seen as a commodity, as a unit of investment to be traded up or down. Attachment to a place, or the interconnectedness of units to make a community, is given little value. The pursuit of ideals, the idea of social or architectural betterment in the provision of housing, has all but disappeared.

Early in the last century, when Arts and Crafts architecture was flourishing and the first garden cities were being planned, the German architect Hermann Muthesius publishedThe English House, which was based on the premise that this country was particularly good at domestic architecture and that countries such as Germany should look and learn. It is unlikely anyone would want to do this now, as new British homes have, as well as the highest prices, the meanest dimensions to be found anywhere in Europe. What we have instead are a series of distinctive if largely inadvertent types, created by a warped market, which might be summarised thus:

Rural eyesore

An attempt to squeeze housing units into places where people want to live (the countryside in southern England), but the people there already don't want any more. Compromise ensues, in which new houses take on a huddled, crowded air and are given a traditional style to mitigate their intrusion. Making a new place with positive and exceptional qualities is out of the question, as all the developers' creative energies have gone into wrestling with the planning system to get their permission.

Investment silo

In London and some other big cities, dense apartment blocks are built with the primary purpose of creating vehicles for investment. Sometimes they are towers. In the previous decade, these developments were primarily aimed at British-based buy-to-let investors; currently the main target are overseas buyers. These projects typically have just enough decking, white paint and glass balustrades to allow good-looking young couples to be photographed inside them holding glasses of white wine, such that the adjectival nouns "luxury lifestyle" can be attached. They also have enough odd angles, or multicoloured cladding, to claim the adjective "iconic".

Affordable silo

Similar to an investment silo, to the extent that housing associations are now the main providers of affordable housing, and are also pressured to behave more and more like property developers. Their products therefore look increasingly like those of developers, although with some reductions in the luxury lifestyle and "iconic" elements. On the other hand, they tend to be built with better standards of space, as housing associations have to follow stricter rules than private developers.

Student silo

Exploiting loopholes in the planning and regulatory systems, which make fewer demands on student housing than other types, property companies have in recent years rushed into this market. Among the attractions of students to developers is that they can be put into even smaller spaces than anyone else. The typology is similar to other types of silo, but with still less in the luxury lifestyle department.

Northern disaster zone

 Parts of Liverpool and Gateshead have been demolished by the government, the old streets replaced with smaller numbers of new homes. The result? The uprooting of people who wanted to stay put and zones of demolished and empty buildings. Photograph: Nigel R. Barklie/REX

Parts of Liverpool or Gateshead, for example: places afflicted by the last government's Housing Market Renewal Pathfinder project, where about £2bn of public money was spent buying up streets in areas of low value, demolishing them, and replacing them with smaller numbers of new homes. The theory was that, under the laws of supply and demand, reduced supply would raise values. The reality was the breaking up ofcommunities, the uprooting of people who wanted to stay put and devastated zones of demolished and empty buildings.

Overcrowded London

Flats and backyards adapted to house as many people as possible.

Empty Belgravia

Extraordinarily expensive houses owned by people with properties in several other countries, such that they are usually unoccupied. Often also iceberg houses, with multifloor basements expensively created underneath, to create further quantities of void.

Nonexistent new town

Successive governments are lured to the attractive idea of the new town, as it enables large numbers of homes to be built while annoying fewer residents than if they have been spread over a wider area. It appeals to politicians' love of a visible gesture. The same governments then fail to provide the infrastructure and planning to make these towns happen. The last administration promised both a new city in the Thames Gateway, to the east of London, and a series of "ecotowns". Very little of either appeared.

It is not in fact so difficult to create good modern housing. There are well-known examples in continental Europe, often cited in discussions of the subject, such asHammarby Sjöstad in Stockholm, Vauban in Freiburg, and Borneo Sporenburg in Amsterdam. Peter Hall, the planning expert whose recent book, Good Cities, Better Lives, explores the best European examples, says that there is an "extraordinary similarity" between these schemes: they have good public transport, from which all homes are within easy walking distance, and "a good disposition of semi-public spaces", such as playgrounds and shared gardens.

 St Andrews in East London: housebuilder Barratt, not always a byword for design quality, is responsible for this project with its emphasis on robust detailing, balconies and shared space.

Nor is Britain incapable of decent developments. Barratt, a housebuilder not always associated with design quality, has built the St Andrews and Barrier Park projects in east London, albeit only after prodding from the London Development Agency, the public body that sold it the land. Richard Lavington, one of the architects of these developments, says that the aims were "to put a balcony on every unit, and to create a positive interface between private and public", by which he means placing family homes close to shared open spaces and streets in such a way that they might readily use them. He also sought "clear, robust detailing" that would be "straightforward to build".

Again, this is not complicated stuff and the developments live up to these claims. Cognoscenti of new housing will also know of fine, small-scale projects by the developers Crispin Kelly of Baylight and Roger Zogolovitch of Solidspace. Kelly says: "Big windows and high ceilings are a start, and lack of fussiness – having the confidence to do things simply." Inside, he likes bonus spaces – on a stair landing for example – where a child might do homework, and outside something as basic as a bench that encourages neighbours to meet. Like Kelly, Zogolovitch likes undesignated spots "where you might set up a cello or an easel or write a novel". He uses design to make small spaces feel larger and give them personality.

 Kevin McCloud at The Triangle housing project in Swindon. Photograph: Professional Images

In Swindon there is The Triangle, created with the help of Kevin McCloud's company Hab, which also stresses the importance of shared space and simple design. And, when you ask for examples of good new housing, you keep being referred back to Cambridge. Here is Accordia, which won the Stirling prize in 2008, and the university-backed £1bn plan to create 3,000 homes, half of them for key workers, on 150 hectares in the north-west of the city. Also in Cambridge are developments such as the "Scandinavian-style"Seven Acres, by the multinational construction company Skanska, which again is based on the virtues of simplicity and shared space.

But these bright spots are too rare and require favourable conditions, such as having a TV personality or an ancient university to back them. They tend to be in places such as London or Cambridge, where prices rise faster than elsewhere. This helps to pay for more quality, but by definition makes it harder to achieve.

The housing crisis is one of both quantity and quality. Some 250,000 new homes a year are said to be needed, but after 2008 the number fell below 100,000, mostly built by private housebuilders but also by housing associations. In the postwar peak in the late 60s, more than 400,000 were created a year, many of them by the councils later banned from building by Margaret Thatcher. Meanwhile, the private sector built at a reasonably steady rate from the late 1950s on, between 150,000 and 250,000 a year. Until the 2008 crash, that is, when output plummeted to a level not seen for half a century.

Blame for this lack of supply is usually placed on the planning system. There is nowhere in southern England for new housing to go or, rather, nowhere where voters and therefore politicians want it to go. Suggestions of building anything on the green belt bring accusations of desecration of a national treasure and similarly with rural locations further from big cities. The theory that brownfields, that is ex-industrial sites, could answer all housing need has proved challenging in practice. Such sites are not always where people want to live.

Suggestions for fixing the problem include, as always, the new town or, as George Osborne likes to call it, the "garden city". He used the term when repackaging existing proposals for Ebbsfleet in Kent, and presenting them as his invention, but his duplicity should not obscure the possibility that it might be a good idea. Peter Hall passionately believes that the principal hope for housing is building new towns and town-size extensions to existing cities. The new towns created in the 1960s, of which Milton Keynes is the biggest and best known, may have become the butt of patronising jokes, but, says Hall, "were really rather successful". They did their job of relieving pressure and "all the evidence shows that people like living there".

Another idea is to fit more homes into London, which is several times less densely populated than, for example, Paris. Another is to encourage people to build their own houses, which currently accounts for a minute proportion of the total. Another, popular with the current government, is the "neighbourhood plan". Here, local communities (usually rural) put together their own proposals for development so that some of the proceeds go to shared benefits and growth is no longer an aggressive intervention by outsiders. It might also help if we moved away from the preoccupation of home ownership with the help of decent properties for private rent. Michael Heseltine once said that "there is in this country a deeply ingrained desire for home ownership", but in 1900 90% of homes, at almost every level of price, were rented.

All these suggestions have merit and the answer is almost certainly to embrace all of them and more. We have to go from our current culture, where new housing is treated as pollution, and something to be squeezed through the planning system with the greatest difficulty, to one where it is seen as a positive asset. There is a vicious circle – new development is poor because it takes so much effort to overcome objections and people object to it because it is poor.

But none of these ideas will happen without the thing the coalition has been least willing to employ, which is active and forward-looking public intervention. It is hard to build a new town, or a well considered rural expansion, without things such as compulsorily buying land, paying professionals to plan it or providing transport. As Dickon Robinson, formerly of housing association the Peabody Trust puts it: "The market has failed. It's time to put some controversial ideas out there."

The compulsory purchase by government from private landowners sounds communist, but it was used (for example) in the "renewal" of northern cities. It is just that politicians are more reluctant to wield it in Kent than in Gateshead. If we are sceptical about the power of planners to achieve their objectives, we only need to look at the Netherlands. There, they had a similar scale of housing shortage, in proportion to the country's size, to the one that has been diagnosed in Britain for the past 15 years. Unlike Britain, they fixed it, by building nearly half a million new homes.

Planning apart, there is a deep flaw with the idea that the market alone will meet all the country's housing needs. The problem is not only to do with the numbers supplied, but with how much each home costs and housebuilders cannot be expected to lead a process that results in the value of their product going down. They would rather sit on their land until such time as its price goes up, which means that some other agency has to do what they won't, which means, in effect, that the government has to intervene more actively in promoting building – by acquiring land, producing considered plans for its development, and then promoting such development.

Given that in much of Britain the price of homes is high, a slow deflation might be desirable; the ideal could be that prices stay the same, so that they gently fall in real terms. But the coalition's big idea is the opposite. With Help to Buy, changing pension rules and other measures, they have stimulated demand without a corresponding increase in supply, such that prices go up further. As the Financial Times has said, this is economically illiterate. It would be a useful first step to reverse these policies.

We are now at a moment similar to the 1970s, when ideas about housing that had lasted a generation stopped working. Then it was the legacy of Clement Attlee's postwar government, which believed in massive state provision of housing, but which ended up restricting freedoms and too often creating homes people didn't like. Thatcher's policies were a necessary corrective, and had real benefits, but now they too are failing. It is time for something new.

It's not easy to champion planning, as it tends to summon images of faceless bureaucrats and grandiose visions gone wrong. But, as Hermann Muthesius recognised in the early 1900s, and as Peter Hall argues about 1960s new towns, it is not un-British to plan and design new communities well. The national dependency on high house prices has, in its effects, become an economic, social and cultural disaster. Active intervention is needed. As someone once said, there is no alternative.