After the boom, the bust

After the boom, the bust

Any suggestion that Britain's overblown, over-hyped and over-valued property market is due for a soft landing after the excesses of recent years has just been exploded. We've had the boom: welcome to the bust.

House prices have fallen for seven successive months. Over the past six months, prices have dropped at an annual rate of 11.4% and over the past three months at a 16.1% annualised rate.

Sketching out the data helps expose some of the myths that have grown up around house prices. Myth No 1 is that the problems in the US real estate market would never spread across the Atlantic. This was always a dubious proposition. Both Britain and America have suffered from property bubbles and the key point about bubbles is that they burst. The US bubble burst last year; Britain's has burst this spring.

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Myth No 2 is that there is no possibility of a repeat of the early 1990s crash, because that was a one-off caused by excessively low interest rates being followed by a period of 15% interest rates. Since bank rate is now a third of its level in 1990, there is no chance of the UK suffering the same sort of crash again, particularly since this is a small island with tough planning laws and favourable taxation for home owners.

This is a seductively plausible but flawed argument. Interest rates are only one of the factors that affect house prices: just as important is the ratio of earnings to prices, the share of a household's income that is taken up paying off the mortgage and the ability of first-time buyers to get a home loan. All three have been flashing red in the UK for some time. The earnings to prices ratio has risen to record levels; servicing a mortgage takes up a bigger share of family budgets; and the credit crunch means that first-time buyers have found it harder to get a loan.

Myth No 3 is that the pain will be confined to the housing market. Apart from the economy's reliance on the property market, there is a strong correlation in the UK between house prices and consumer spending. The likelihood that the Bank of England will keep interest rates high to fight inflation means that there is a very strong chance that the recession will spread to the rest of the economy.

Finally, there's Myth No 4: that this is disastrous news. It may be for those with uncertain job prospects who bought at the top of the market, and it is obviously not wonderful news for a government 20 points behind in the opinion polls. But the collapse of the housing bubble will end what has been a huge shift in resources from younger and poorer people struggling to buy a property to older and richer people who already have their own home.

It will mean less reckless lending and borrowing, and a more stable economy. The International Monetary Fund has said that 30% of the rise in house prices in the UK cannot be explained by economic fundamentals: a fall in prices of that magnitude is now on the cards. A crash was inevitable.

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