How often must I say it? Falling house prices are a good thing, not a bad thing. It is property madness that got us into this financial mess in the first place, and the credit crisis will not be resolved, will not begin to be resolved, until house prices start to become more rational. That means house prices must come down.
Average UK houses prices of over eight times average earnings are unsustainable, morally or financially. Most homeowners, who are sitting on large paper gains, know and accept this - many have the decency to be embarrassed about it. The government knows it too, deep down, but it can’t face up to the political reality of what it means. Ministers prattle about the need for “affordable housing” and then introduce more measures designed to keep prices from falling, ie becoming affordable.
It was last week’s announcement by the Halifax that UK house prices had fallen by 2.5% in March that led to the latest housing panic. The editorials cried out for dramatic cuts in interest rates “to prevent a housing melt-down”. The Prime Minister insisted, like some real estate Canute, that the fall was “containable”. The Chancellor, Alistair Darling, then threw a token £1500 at first time buyers (which sounded suspiciously like the SNP’s £2,000 bung-that-never-was which Labour criticised) and set up a mortgage review under the former boss of HBOS.
Brown then leant on the governor of the Bank of England to cut interest rates by announcing, falsely that:"Because we've got low inflation we can cut interest rates.". Mervyn King dutifully obliged, cutting base rates to 5% in what was described as a “desperate bid to halt the slide” - even though the slide has hardly started and the cut will have no impact on mortgage rates which continue to go up. Brilliant! When central bankers start setting interest rates to placate politicians you know that we really are doomed. It was low interest rates that inflated the bousing bubble, so let’s have another dose of it! One last puff of air in the three trillion pound balloon.
To repeat: a housing ‘collapse’ is necessary and unavoidable if the economy is to be rebuilt and restored to anything like equilibrium. You cannot have a stable financial system while property prices are so high that people on average earnings and higher cannot afford to enter the market. This forces working families to take out loans they cannot afford, which leads to default, which leads to the collapse of bonds, which leads to Northern Rock. The governor of the Bank of England, Mervyn King, should know this better than anyone since he had to deal with the collapse of Britain’s fifth largest bank. Now the Council of Mortgage Lenders is demanding yet more cash from the government to deal with the “mortgage famine” they have created by their own irresponsible lending.
The Bank of England is not supposed to look after the welfare of banks, that is supposed to be down to the Financial Services Authority. The Bank of England has one simple task: combatting inflation by keeping the Consumer Prices Index below 2%. So why is it cutting interest rates when the Index is 2.5% and rising fast? Real inflation, as anyone who lives in a house, drives a car, or goes to the shops knows, is well over 4%, and there is a lot more inflation in the pipeline. If the Bank were doing its job, interest rates should be static or even being raised. But it is at moments like this that you realise that the country is being governed by fools, by people who behave in a contradictory and irrational manner.
Forget inflation, house prices have been the prime focus of government economic policy for the last decade. Labour won two elections by betting on house prices. Property values nearly doubled in time for the 2001 general election; and nearly doubled again for the 2005 general election. Middle class home owners saw their principle asset rise in value by around £100,000. Not surprising then that they were minded to vote Labour.
The only problem was that this was utter and complete madness; the most reckless exercise in economic mismanagement in modern history. The housing bubble and the consumer boom based on it, was a deliberate act of policy, as the former Bank governor, Eddie George admitted to a commons committee in March last year. He knew it couldn’t last forever but suggested, as the economist John Maynard Keynes said: “in the long run we re all dead”.
Well, not so Mr Keynes. In the long run we may be dead, but our children are very much alive and having to cope with the mess left by their reckless parents. I already feel a deep sense guilt about what my generation has bequeathed: we have damaged the climate, debased politics, and left young people with the choice of unsustainable debt or effective homelessness.
The Dad’s Army of bank managers who made our parents’ sweat about how they would pay their mortgages - pegged at 2 1/2% of earnings with a 10% deposit - did so because they understood the evil of debt. How it destroys families and lives. Our modern bank managers are pushers luring vulnerable people into a fatal addiction through sophisticated devices like credit cards, 125% mortgages, unsecured loans. I still get junk mail every day trying to get me to ‘consolidate’ my debts, ie borrow more.. These people have lost any sense of social responsibility.
But they created an economy in our own image. Our greedy and grasping materialism is ultimately what allowed the financial services sector take over and destroy the stable society of low house prices, secure pensions, social welfare and public housing that the post-war generation built. In came apart in the 1980s,with council house sales - the biggest bribe in modern history and the moment our collective obsession with ‘property’ began. Now, after a tripling of house prices Britain is the most indebted country in the developed world.
The property market has made a fool of anyone who has tried to run a business. Why slave away for years to build a firm when just by sitting in a house in London, or even parts of Edinburgh, you could turn into a millionaire? . Property madness has made fools of anyone who has ever saved, responsibly, for their old age. Why bother, when all the tax advantages go to houses which are free of tax. The government encouraged us to pour more an more money we didn't have into houses because they stupidly believed that high house prices equalled prosperity.
Prime Minister Brown likes to predent that the credit crunch is something that begins and ends in the USA. It isn’t and it won’t. House prices have risen far higher here relative to earnings than they ever did in America and have a lot further to fall - 30% according to the International Monetary Fund. The only compensation is that it this is likely to destroy Gordon Brown’s place in history.