Jeremy Warner's Outlook: Ministers think housing woes all America's fault. They should look to beam in own eye

Back in the days of the dotcom bubble, the fashionable thing to argue in the face of what virtually everyone agreed were unsustainably high share prices was that the stock market would plateau for a number of years until earnings growth returned valuations to more normal levels.

As soon became brutally apparent, it didn't work out that way. Instead, the market corrected violently, as it always eventually does when prices get seriously out of kilter.

The optimists, among whom we have to include a string of Government ministers, argue much the same thing about today's housing market.

The fundamentals underpinning UK housing remain strong, they contend, so once disruptive mortgage markets return to normal, the housing market will be just fine.

In words I suspect she will come to regret, Yvette Cooper, Chief Secretary to the Treasury and former minister for housing, this week put the now-familiar Government line. The underlying circumstances of what's going on in the UK housing market are very different from the US, she said.

There, the falls in house prices are being driven by a long-term oversupply of housing and a very large overhang of unsold properties. Here, by contrast, demand for housing has outstripped the supply of new homes for many years, and the projections suggest it will continue to do so over the next 10 years as well.

The position, Ms Cooper argued, is different from the US where problems in the housing market infected the financial sector. Here by contrast, problems in the financial sector have infected the housing market. Echoing a theme now frequently adopted by the Prime Minister and the Chancellor, she appeared to blame all our woes on the profligate Americans.

There are elements of truth in what she says, but, in the round, the argument is largely mistaken, as is the contention that a violent correction in the housing market can still be avoided. Even relatively illiquid markets such as housing will always return to trend precipitously once the process gets under way.

If there were any remaining doubts about it, we've now had three surveys in a week – Rightmove, Nationwide and now Halifax – which show that house prices are falling year on year for the first time since the mid-1990s.

Admittedly, these falls are not yet pronounced and they come after a prolonged period of double-digit increases. Yet all historical evidence suggests that once the housing market turns negative, it will then fall significantly until the overvaluation in prices is removed. Hopes of a gentle correction are almost certainly misplaced.

The problem is that housing simply got too expensive. There are two standard measures by which this can be judged. One is value as a multiple of average earnings. On this yardstick, house prices have reached ridiculously high levels never before seen in Britain, and are by some distance now higher than the previous peak before the housing crash of the early 1990s.

This is sometimes justified by the fact that interest rates are lower, so that the costs of servicing a mortgage take up a smaller proportion of disposable income than was once the case. Unfortunately, the affordability argument is largely illusion.

Interest rates are relatively low because inflation too is low by historic standards. In the past, inflation could be relied upon to reduce the value of the loan relative to earnings over time.

Low inflation means that this no longer happens to the same degree. In the past, the cost of buying a house tended to be front-end loaded. Low interest rates make it back-end loaded, but the ultimate cost to the buyer over time may be much the same.

To many people, these may seem somewhat academic waters. Back in the real world, however, things don't look any better. The scale of the loan needed to keep pace with house price inflation means that, as a percentage of disposable income, mortgage-servicing costs are on average back to where they were at the time of the last housing market peak in the late 1980s.

What's more, the mortgage famine is set to make the costs higher still regardless of what the Bank of England does to interest rates. The number of mortgage products on the market has more than halved over the past year. Those left in the market are able to charge accordingly.

Everything points to a very nasty, if entirely necessary, correction. Nor is it one that can be blamed on the Americans. Yes, prices became too expensive because demand exceeded supply. But the reason this occurred was not primarily because of demographics, or planning constraints, but rather because there was too much cheap and easy credit.

In this regard, Britain certainly mirrored the US, but it is disingenuous to blame the US. Britain's own particular credit boom was very much the result of made-in-Britain public policy. With luck, the return to reality in house prices will occur without the accompanying wider recession that so marred the early 1990s. But it is touch and go, and, for some, it will feel exceptionally painful whatever happens to the economy.

Gordon Brown was back at the dispatch box yesterday robustly defending himself against the charge of returning Britain to the dark days of the last Major government.

There were 200,000 repossessions in the first two years of the 1990s, he thundered, against just 27,000 last year.

In fact the number was 120,000, taking 1990 and 1991 together. Rather more ominously, home repossession orders, which measure houses in the process of repossession though not yet repossessed and which are therefore a rather more forward-looking indicator, stand at 100,000, or about the same as in 1990. Things, as Labour's 1997 election theme tune went, can only get better – or perhaps not.