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.

But in the short term, which is the only thing Mr Brown really cares about, the only question is whether, like Wile E Coyote, the housing market will suddenly plummet to the ground; or whether it will glide gently back to the ground.

The good news is that price falls over the next year are unlikely to be more than a few percentage points. Property prices are still most likely to readjust primarily over the next three years by growing more slowly than incomes; but what this means is that the housing market will be a poor investment, at least until the start of the next decade. It also means that the economy will grow only very slowly, that consumer spending will be badly affected, that unemployment will rise and that the budget deficit will surge, putting pressure on Mr Brown to rein in spending or put up taxes yet again, which would be a disastrous option. There will be pain and many people will default on their mortgages; but fortunately it will not be another early 1990s-style crisis.

For Mr Brown, the looming correction in house prices will be the most serious blow yet to his fading reputation for competence. But it is better than the alternatives – either a housing market that irrationally keeps on defying gravity or a proper crash – both of which would be real Looney Tunes outcomes.