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Housing crisis: Britain's house of cards
AS THE US economy moves sharply downwards, the threat of a crash in the British housing market is becoming ever more real. Halifax, the country's biggest mortgage lender recently reported that house prices fell by 2.5% in March, the biggest monthly fall since 1992.
Marc Glasscoe, Socialist Party Lincoln
Now the Royal Institution of Chartered Surveyors says that house prices are declining at the fastest rate since their records started in 1978.
All this raises the spectre of a repeat of the early 1990s situation, when thousands had their homes repossessed and many more faced the misery of 'negative equity'.
Growing economic crisis forced Chancellor Alistair Darling to call on banks to pass recent interest rate cuts onto their customers, but they are more interested in protecting their own profits.
As the Bank of England cut interest rates for the third time in five months, Alliance and Leicester, Abbey and Woolwich all raised fees on their fixed-rate mortgages, while Nationwide greedily raised rates by up to 40% on some of its products.
On 9 April Abbey withdrew their last 100% mortgage. This was shutting the stable door after the horse has bolted. By allowing such borrowing on inflated house prices to take place over the last decade, the big banks helped to sow the seeds of the coming crisis.
House prices rose by around 171% in the last decade, from an average of £70,696 to £191,556. According to Nationwide's index, the boom has been even steeper, with a 215% increase between the first quarters of 1997 and 2007.
Vince Cable, Lib Dem Treasury spokesperson said recently that the housing market was due for a "painful correction," pointing out that the housing bubble had been kept inflated by exceptionally high levels of personal borrowing.
Just before the credit crisis broke last summer, it was revealed that personal debt in the UK stood at £1.35 trillion, more than the country's GDP. To put it another way, Britain has gone bust.
The IMF calculates that Britain's housing market is overvalued by 30%, while economist David Milnes has predicted a price drop of 10% this year, with a further 4-5% next year. This would mean a 20% drop overall in real terms, increasing the risk of negative equity.
The world economy is entering a period of crisis, that is no longer in doubt. Ben Benanke, chair of the US Federal Reserve says the US economy is likely to contract in 2008.
In Britain there were 114 'profit warnings' from companies in the first quarter of 2008, up 11% on last year and the highest for a first quarter since 2001. The largest number of warnings came from the retail sector, indicating that consumer confidence in the economy has been hit hard.
As consumers become increasingly reluctant to part with what little cash they have, a vicious circle will start developing, with the economy contracting further. The government has already been forced to nationalise Northern Rock, and may yet face more crises in the financial sector. This month, Bradford and Bingley bank were forced to deny that they have had to go to the market to raise emergency funds.
With simmering unrest and likely industrial action in the public sector, far from a smooth early period in power, Gordon Brown may yet be facing his own winter of discontent.
In The Socialist 16 April 2008:
Workplace news and analysis
Global food crisis
Socialist Party election campaign
Socialist Party feature
Socialist Party news and views
International socialist news and analysis