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Yet the notion that this is an inevitable market correction will provide scant comfort to those it is affecting. The Halifax statistic, indeed, hides the true seriousness of the situation. It is not just that prices are falling; it is that many thousands of homeowners are finding themselves in a financially impossible situation. They bought homes, at inflated prices, with the aid of mortgages which were only just affordable at the fixed rates on offer a year or two ago. As those fixed rates expire, borrowers are finding themselves stuck with their lender’s much higher variable mortgage rate. Combined with sharply rising energy costs and, for low-earners, a sharp rise in taxation, it is enough to break budgets. Every week, property auction catalogues become thicker as they fill up with repossessions. In one case, a flat in Ipswich sold at auction for just half what it had sold for new two years ago. Many other repossessed properties have failed to sell at all. If the Halifax house price index took account of what is happening in the auction room — it is in fact based only on properties purchased by its own mortgage customers — it would tell an even more alarming story. Our map of ‘subprime Britain’ last week was a vivid illustration of the potential extent of the problem.
There is, of course, an obvious and unsettling parallel for what is happening in the British property market: America’s subprime disaster, in which thousands of low-income homeowners have defaulted on mortgages as their initial, ‘teaser’ interest-rate periods come to an end. Yet still there are people who believe the British housing market can somehow remain immune from what is happening in the US.
One such individual is Alistair Darling, who in February tried to reassure us that the British housing market could not possibly suffer big prices falls because, unlike in the US, ‘demand outstrips supply’. At the time it seemed an extraordinary remark for the Chancellor to make; it was tantamount to him boasting that his government’s planning system had created a chronic shortage of housing.
But far more worrying were the Prime Minister’s remarks when interviewed by the BBC’s Nick Robinson this week. Gordon Brown’s response to the news of a slump in house prices was first a weak reassurance that all will be well as long as he remains ‘vigilant’ — followed by an announcement of the extension of a scheme to encourage people to buy homes as part of ‘shared equity’ schemes, where a buyer purchases a share in a house and rents the rest from a housing association. What he failed to explain is why on earth people on modest incomes would want to invest in a sliding housing market, knowing that their investment is likely to diminish rapidly in value over the next few months. Those with more than a passing knowledge of the last housing slump will recall that some of the most badly affected properties were precisely those in shared equity schemes, which languished for sale long after the rest of the housing market had recovered.
The downturn in the housing market is the moment Mr Brown must have been fearing above all others. When still shadow Chancellor, he staked his reputation on bringing about ‘an end to boom and bust’ — a slogan with electoral traction, given that in 1997 the early 1990s slump was fresh in the minds of the middle-class home-owners which Labour needed to win over. It has been clear for several years that he failed to bring an end to boom — house prices have nearly trebled since 1997 — but few were minded to complain about that.
As for the bust, that is a different matter. The repossessed will have good reason to wonder whether Mr Brown has exacerbated their problems: with the housing market rising sharply in 2003, the then Chancellor switched the official inflation index, obliging the Bank of England’s monetary policy committee to track an index which excluded all housing costs. The result was interest rates lower than they otherwise would have been, and a continuation of the housing boom. Repeatedly, Mr Brown and the Financial Services Authority, the agency he set up in 2000 to oversee banks and building societies, ignored the many warnings of loose lending practices and, in the case of some inner-city apartment developments, outright fraud. Some of the inflated prices in new developments are the result of corrupt surveyors overvaluing properties to enable fraudsters to take out loans worth much more than the properties they are secured against.
For Mr Brown, these errors could prove electorally fatal. In contrast to what became known as the white-collar recession of the early 1990s, the most heavily mortgaged postcodes this time around have been revealed to be staunch Labour-voting districts including Glasgow, Manchester, Tyneside and the Welsh Valleys, together with marginal seats in North Kent, the East and the West Midlands. Taken together, these were the areas of Britain which appeared to be doing well from a decade of Labour government, where new, upmarket housing developments seemed to be the bricks-and-mortar proof of the economy’s rude good health. Only now are the voters discovering just how much of this was a precarious edifice built on fatal foundations of debt.
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