The end of the house price boom is what will finally sink Brown

15 December 2007

Like Wile E Coyote, the cartoon character who stays aloft long after he has run off the edge of a cliff, the British housing market has constantly defied gravity.

No more: Labour has seen a 28-point lead on economic competence in September turned into a six-point Tory lead (even though the economic ability of today’s Tory leaders is entirely untested). The Tories’ impressive 11-point lead in voting intentions in the polls coincides with a growing realisation that the housing boom has ground to a halt. The switch of sentiment to the Tories was triggered by Mr Brown’s dithering over calling an election, the Northern Rock fiasco, the loss of child benefit data and the Labour party fundraising scandal. But it is the end of the house price boom which will strip Mr Brown of what remains of his Teflon coating.

Halifax’s figures on Wednesday show prices slumped 1.1% in November, following drops of 0.6% in September and 0.5% in October, the first house price fall for three months in a row since 1995. This will deal Mr Brown a triple blow: the decline in house prices is set to reduce consumers’ wealth, cut economic growth, boost the budget deficit and destroy the electorate’s confidence in the state of their own (often parlous) personal finances; a surge in interest payments as a share of incomes is hitting their take-home pay as surely as any tax increase; and low yields combined with zero or negative capital gains tax will halt the buy-to-let market in its tracks, upsetting hundreds of thousands of people’s plans for their retirement and investment.

Take just two series of devastating statistics that show the trouble Mr Brown is in: according to figures from the Council of Mortgage Lenders, interest payment as a percentage of income has shot up from 14.9% in February 2006 to 18.6% in September 2007. Almost all the increase in wages during that time has been gobbled up by higher mortgages; combined with higher taxes, petrol prices and inflation, it is hardly surprising consumers are beginning to feel as if their purchasing power and disposable income is declining.

This will only get worse: 110,000 households a month come to the end of their fixed-rate mortgage deals over the next year; with two-year fixed mortgage rates 1.5 percentage points higher than in October 2005, this means interest payments will shoot up by a third. Standard & Poor’s, the rating agency, calls this “one of the largest payment shocks witnessed since the 1990s”. On Tuesday, the Financial Services Authority warned that mortgage lenders would batten down the hatches so borrowers should brace themselves for “very difficult” market conditions next year; at least 1.4m homeowners face a sharp jump in loan repayments. It was the last thing Mr Brown needed to hear.