The government has said it regrets housing being unaffordable to so many people. It has said it wants housing to be more affordable. The PM himself has proposed building more houses so there are cheaper homes available.

Ministerial speeches do not reveal much understanding of how the housing market works, or why house prices have risen so much. Ministers seem to forget that most homes bought and sold are second hand homes, not new ones. Many are bought on mortgage. The main reason house prices have risen so much under Labour in recent years is that we have lived through a period of easy money, when the government and the Bank of England have effectively encouraged people to borrow and borrow by keeping interest rates so low. The banking and financial service regulators, who regulate the banks and building societies, have been relaxed about these institutions lending higher multiples of ever higher property prices, on the basis of “affordability”. When interest rates are low even a large mortgage on a high house price is “affordable” when comparing the level of interest payments to the level of many people’s salaries. In conditions of easy money, requiring the building of some more homes at lower building cost will not necessarily create much more affordable housing. The market as a whole will still be buoyant thanks to easy credit, and the price of the new cheap homes will rise in the second hand market as a result. Land may get dearer through the extra credit, thwarting the attempt to build much lower priced homes.

More recently the Bank has realised that it had allowed inflation to rise too quickly as a result of the very easy credit conditions it had presided over or stimulated. It has put interest rates up substantially from a low base. People have found their mortgage payments rising sharply as result. An affordable mortgage at 5% may not be affordable at 7.5%, as the monthly payments have gone up by roughly 50%.

The government finds itself in a paradoxical position. Having called for more affordable homes, it should be delighted if house prices now fall as a result of the credit tightening. Somehow I don’t think they will see it like that, because of course they did not really it mean it when they said they wanted more affordable homes, if that means everyone’s house falls in price. I have never heard an interviewer ask this simple question of Labour Ministers - “When you say you want more affordable housing, doesn’t that mean you want house prices to drop?”

If all things were equal house prices would now fall. Today we hear that mortgages have gone up in price again. It shows both how the Bank of England is no longer controlling the interest rates that matter to the rest of us, and shows that of course there is an impact on the real economy from the problems in financial markets. Mortgages are dearer, so people will only be able to borrow smaller sums of money because the monthly interest payments will be higher. There will also be fewer mortgages available. Banks and Building Societies have less money to lend, so they will be less willing to lend to the marginal cases. In other words, the very people the government wants to help who find it difficult to afford a home of their own by purchase, will be the ones most badly affected. All this implies declines in house prices, just as we saw declines in share prices when the Stock Market first woke up to the credit crunch.

However, things are not quite that simple. Most estate agents are forecasting much slower growth in house prices, rather than actual declines. They usually do say that but they could be right. There are two pressures which help offset the impact of fewer and dearer mortgages.

The first is the government has chosen this moment to launch Home Improvement Packs. This is reducing the number of homes for sale. People are not now so willing to put their home on the market just to see if there are any good bids out there, as they would have to spend a lot of money on a HIP before they were allowed to! Just as demand is being reduced by dearer credit, so supply is being reduced by government interference.

The second is there are still a lot of cash buyers in the UK. The bonuses paid this year in the financial sector have been good, and many of the recipients are keen to buy some permament reminder of their success. There are still many rich foreigners in London with cash to buy. This could keep things going until the cavalry arrive - and arrive they will. The Central Banks of the USA, Europe and the UK are likely to cut interest rates, with the US leading the way, probably quite soon.

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