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Mortgage crisis

The housing bubble is finally bursting

Houses in London’s Notting Hill: is the boom over? Getty

The house-price crash so many people wanted is “now in prospect”, says Juliet Samuel in The Times. Not since 1880 have prices been this high relative to income. The conventional view is that this boom has been a “certifiably ‘good thing’”, because rates of home ownership soared from less than a quarter of households in 1918 to more than two thirds in 2000. With so many voters benefiting from the “feel-good ‘wealth effect’” of rising prices, it made political sense to incentivise home ownership with “all sorts of fiscal favours”: exempting homes from capital gains tax, freezing council tax bands, and not expecting pensioners to fund their own care with their housing wealth.

But now many of these homeowners face “impending personal catastrophe”. Some 1.4 million will come off fixed-rate mortgage deals this year, into a market where interest rates have already risen fourfold in 24 months. And with each year that passes, another slice of the 7.5 million mortgage-holding households will be forced to do the same. This will likely cause a “sustained and dramatic fall” in property values. Last time prices fell significantly, by 17% in 2008, central banks “rode to the rescue” by slashing interest rates and printing money. But to do the same again this time would mean “abandoning the fight against inflation”. So the government is left with a dilemma: bail out mortgage-holders and accept higher inflation, or sit back as property prices crash, causing bank failures and economic depression. It’s pretty clear which course they’ll choose.