Global Dashboard – Blog covering International affairs and global risks

UK election debate – the housing crisis

April 29, 2010 | More on Economics and development, UK | 14 comments

If the BBC leaders’ debate tonight devotes more time to bigotgate than to housing, I am going to dedicate the rest of my days to working for the Corporation’s demise.

Britain’s unsustainable housing market is at the root of many of the country’s problems and could wreak appalling damage on voters during the next parliament. It must feature in the debate.

Someone should start by reminding Gordon Brown of a promise he made in his first budget speech in 1997:

Stability will be central to our policy to help homeowners. And we must be prepared to take the action necessary to secure it. I will not allow house prices to get out of control and put at risk the sustainability of the recovery.

As I argued recently:

When Brown spoke, the average house cost £75k  - about £10k above the early 1990s nadir. A long long boom was just beginning. Prices would peak in February 2008 at an average of… £232k!!!

In other words, Brown promised not to let house prices spiral out of control and then allowed them to treble, during a period when household disposable income increased by only 30% or so.

2007 saw what is often called a housing price crash, but as this graph shows, it was really only a blip.

As the government pumped money into the economy and pushed interest rates to unprecedented low levels, the bubble started to inflate again. House prices are now back to the levels of June 2007.

Second guessing the housing market is a mug’s game, surely this is unsustainable. British houses are overvalued by nearly a third, according to one measure. Worse is the amount of mortgage debt outstanding$1.238 trillion. By comparison, government debt is ‘only’ £950 billion.

Low interest rates and buoyant employment (relative to the economy’s woeful performance) have kept householder’s head above water – but the highly-indebted remain highly vulnerable to any increase in interest rates or to further job losses.

My best case for the housing market is a long period of stagnation (we desperately need lower prices). Worst case would be a sudden, vicious and self-fulfilling collapse. I believe this is currently the most serious economic risk facing the British people (one which is, of course, interrelated to Europe’s sovereign debt problems).

So what do the major parties have to say about this in their manifestos?

  • Labour wants to expand home ownership and exempt all houses under £250k from stamp duty (likely to push house prices up). It says it will build 110k houses over two years (likely to push prices down).
  • The Conservatives promise to exempt first time buyers from stamp duty if their house costs less than £250k. It wants to put communities in charge of planning, which is highly likely to reduce the number of houses built.
  • The Lib Dems plan to use loans and grants to bring 250k empty houses back into use.

Pretty weak beer, all told. No party questions the shibboleth that Britain needs more homeowners. None is prepared to explain how they will manage risks that have been increased by the response to the financial crisis.

Far less do they have policies to fulfil Brown’s promise from 1997 – to end boom and bust in the housing market radical proposals (see my Long Finance paper) to prevent the mortgage market from screwing borrowers every twenty years or so.

So here’s my question for tonight’s debate:

In 1997, Gordon Brown promised he’d never let house prices get out of control again, but then presided over a housing bubble that has left British householders owing £1.2 trillion on their mortgages. In government, what will you do to stop the housing dream from becoming a housing nightmare?

14 comments »


  1. ""By comparison, government debt is ‘only’ £950 billion.""

    Your statement is incorrect…and I'm being extremely polite.

    In order to suspend rationality, as you clearly have done…. you just got to get me some of whatyever it is you are smoking!

    Either that, or,… I have a bridge I could sell you!


  2. Great post. Do you think think Clegg could make hay by referring to St Vince's repeated warnings on this score over past years (though I'm nt sure if he actually proposed concrete measures that would have deaklt with the problem)?

    But putting aside how to use this to score points , you're right that it's another example of tough-sounding talk on fixing the economy backed up by not much of anything. And it's agood eaxmple of where the 'it came from over the seas' talk falls down – while we wouldn't have emerged unscathed, this negligence has clearly made us worse off.


  3. It also doesn't help that so many news outlets are covering this as if it's to be welcomed. Take this for example:http://bit.ly/ce6JK0


  4. Round and round and round it goes.

    Where it goes too, nobody knows.
    http://www.bloomberg.com/apps/news?sid=a7h1lGnar8…

    Now you do!

    More money printing/bailouts…. more debauched currencies…….. debts that can't be paid, won't be.

    Post democratic high tech feudalism, that is the intention…..be warned!


  5. Dave,
    …. traitor Klegg is an ex-employee of the EU.

    His pension rights from there dictate his actions to sell out this nation to furher his own interests, rather than act in this nations interests.

    It was pension rights from the EU that carried the vote for Lisbon in the Lords, with parasitical folks like Kinnock present.

    If they vote against the EU interests, they face lost pension rights.

    And that's in black and white from the marxist EUSSR


  6. Indeed he doesn't seem to be, even though housing is one issue he really did stick to with his complaints when Brown was sleeping at the wheel.

    But wow, did Clegg miss an opportunity last night. Even though the other parties have prepared their "Vince ain't all that" defences, I think he could have scored big. It's similar to the lack of anti-Iraq populism from last week – maybe he thinks we're over it, and we want positive visions for the future, but my hunch is that "we were the only ones against it", both as regards deregulation and a quite-old war, would go down very well. Voters don't get bored as quicjky as pundits. Interestingly, it was Obama's highest scoring moment on the (admittedly unscientific) worm thingie in one of his debates, even as McCain was trying to make it all about the surge and what to do next. That was a while ago, but not so long as to be irrelevant…


  7. Meander – my figures are from the end of 2009 (follow the link), so they are out of date. Other than that, I think the point stands.

    Dave – yes I think Clegg should make more of Cable. I am amazed he didn’t mention him when the topic came up last night. Though I’m not sure that Cable is offering any robust solutions yet…


  8. Interesting piece David but sadly we didn't get the answer to that question last night. I have to say I listened to the debate on the radio and Gordon did a much better job than I think the polls suggested he just isn't made for TV!


  9. David said….""Other than that, I think the point stands"".

    Sorry, David, but it doesn't… it doesn't even crawl.

    Brown was the one that commited the UK tax payer to stand behind the casino activities of the banks, and forced lunatic mergers which screwed the shareholders of banks not needing that merger. He was the one who insisted on a softly, softly touch when enforcing regulations on these banks. I also saw zero protests when various agreements crawled out of Basle. All hail the BIS, god of banking.

    Brown broke the law of the land, (bankruptcy being one of many), and forced Co directors to do likewise!

    The tax base was fine, and Brown luvs taxes.

    If he had listened to any competent economist, (since he obviously isn't) he would know that towards the end of a debt-soaked economic binge, the marginal GDP generated by each unit of debt injected decreases until the GDP generated becomes negative. The GDP generated for the last 5 or 7 years has been far smaller then the rate of increase of systemic debt. In other words GDP was an illusion, created by an increase in Debt. There was NO GDP growth, absent debt. It was an entire fiction, additionally hidden by fraudulent statistics.

    And the stupid buggers at all levels of economics and gov't claim that they couldn't see it coming!

    They are all bare faced liars…. A first year economics student could see it coming!

    THAT is the economic fraud that sits behind this corrupt, house flipping, gov't.

    And in the theme of the election, each of the main three parties told lies when promising the electorate a referendum on EU membership. Brown lawyers in court (something that we hear remarkably little about, but we should!!!) claimed in his defence that there should be no reasonable expectation of truth contained in an official printed manifesto.
    And the judge agreed!

    That being the case, why should we now believe any word that any barefaced liar, ermm, politician, tells us, ever again??

    Perhaps you'd care to answere that point, because it stands tall, and at attention!!

    Not one sitting MP deserves to be returned, not one.


  10. Dave,

    None of my arguments is a straw man
    I look at the totality of the situation to draw conclusions and trends.
    You claim to be a global dashboard, yet you choose to isolate specifics in order to project a distorted picture, a picture ar variance to the picture projected by the totality.

    You either are one, or the other.

    Returning to the details of your blog….it is largely moonshine…particularly when the EU now makes the vast majority of laws, etc, and where our MEPS are a rubber stamp, and our Westminster MPs, outside of eagerly implementing EU directives, are busy doing nothing in particular, other than their own personal aggrandisement.

    Discussions on who will work with who mean nothing towards policy. Nothing. They are comparable to re-arranging deck chairs on the titanic.

    Absent the creation of a credible budget and policy, and a credible time table for action, the markets will make the decisions needed. After that the freedom to create "policies" will be gone.

    The irony is that a credible budget and timetable will expose the current words from politicians to be what they are…….

    Now lets move to private and public debt.
    A mortagee defaults, this leads eventually to foreclosure.
    1) Increase in social spending
    2) A bank somewhere writes down an asset on a balance sheet, and the P&L takes a hit. Less profits = fall in share price. Reducing assets destroy capital ratios and curtail future lending. Reduce assets by a greater degree and the bank must cease trading or raise more capital….ergo, in extremis, another bailout from taxpayer. Depending on the leverage employed by the bank, capital raising can be required after relatively small reductions in capital.

    A plastic holder defaults….proceed from 2) above again.

    Under the current system, symplistic description above, the levels of private debt may well become public debt via more govt bailouts.

    At some point the debt has to be paid down or defaulted, and if defaulted, then written down by the lender. If the lender goes boom, the State steps in at some point..

    Every day that passes, while our snivelling politicos move deckchairs, the options for action are being reduced.

    Under EU plans, ultimately Westminster will become a mere tourist attraction, and regions report to Sprout Town….with the exception of the SE, who report to Paris. You know this, but you persist in pointless speculation…Daren't you tell the truth? Is it all just a facade?

    If you want to see someone who is guilty of creating straw men….look in the mirror.


  11. Nice post,

    Labour promised us low inflation and low interest rates. They just cooked the books, and changed all the rules on RPI and CPI so they could stay in power.
    http://www.mrscohen.com/personal/-/news/other/con…

    I actually remember a blip in the housing market in 2006 so what did labour allow to happen, lower interest rates and relaxed lending criteria. 5 times joint incomes and 125% mortages.

    The government are there to protect us from ourselves, it was just irresponsible of labour and Brown is utterly to blame for this countries woes.

    D


  12. Part 2

    Brown says Cameron will impose huge cuts and we will get a double dip recession. How clever of him, he is right a double dip recession will happen when Cameron gets in and makes those long overdue cuts and we do see massive job losses and the new recession Labour will say I told you so.

    We have to have this cruel medicine to sort this mess out, the sooner the better, then hopefully we will see house prices fall back to affordable levels.

    Just because we don’t want to lose our jobs / houses doesn’t mean it won’t happen. Just because we don’t want inflation or high interest rates doesn’t mean that won’t happen either. It has to happen to get this mess sorted.

    I have worked through and survived three recessions, negative equity, 21% interest rates, starting tax rates of 33%. Prepare yourselves for the worst and hopefully we will all get through this mess.

    D


  13. Beautifully detailed article. However, what most of us would be asking here is – the scenario in UK might just be a little uncertain to predict considering the austerity drive that has been ushered in by the David Cameron government. What say?


  14. Dear David Steven,

    Thank you very much indeed for this analysis. I am sorry if I am asking a question that is obviously answered above but where does that graph of house prices and average household incomes come from?

    Best wishes

    Matthew Amadeus Devereux

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