Major brings the house down

JOHN MAJOR is presumably not a man much troubled by the prospect of negative equity or mortgage arrears, or even how he will keep up the payments if he loses his job. He can afford to take a dispassionate view of the growing shambles in the UK housing market. And it shows, doesn't it?

The parlous state of the housing market is the result, like so much else in the UK economy, of overkill and simplistic solutions. The original problem of soaring house prices was caused by recurring inflation which made bricks and mortar seem the only safe refuge for small investors. It was compounded by tax relief on mortgage interest which made mortgage money dirt cheap, and by the introduction of competition into a market traditionally reserved for a building society cartel.

The final straw was Nigel Lawson's decision in March 1988 simultaneously to cut taxes, cut interest rates and set off a scramble for mortgages by giving five months' notice of intention to abolish dual mortgage tax relief.

The boom collapsed after interest rates were raised and the economy was deflated in a desperate attempt to kill inflation, which triggered a slump in confidence which still continues. But the Government has persisted in stripping away tax relief and reducing the safety net for social security payments, so that from October anyone losing his or her job will be unable to maintain mortgage payments.

This may seem no more than a necessary adjustment to John Major, but it spells potential disaster to the housing market. Further falls in property prices will trap thousands more in negative equity, a state where even if they keep up the payments, home-buyers cannot sell or move because they cannot redeem their mortgages. Millions more will be forced to try to get mortgage protection insurance policies, a product which in the past has been all but redundant thanks to social security payments.

The current generation of mortgage protection policies is expensive, and many borrowers most in need of them will not qualify. It is unlikely the Government will intervene in this incipient disaster, and the ball is firmly in the lenders' and insurers' court.