Broke: Who Killed the Middle Classes?. David Boyle
was a direct result of the revolution wrought by Howe, Lawson and their colleagues. Of course house prices rise for many reasons, and it is hard to believe that the Corset would have prevented the flood of foreign financial institutions, mainly American, that poured their money into the UK housing market. The fact that fewer homes were built in 2009 than in any year since 1924 doesn’t help. Often prices rose because the middle classes compulsively wanted them to do so. They loved it. It made them feel rich, right up to the point where it ruined them. The Corset may have been impossible to sustain, but its demise marked the end of mortgage rationing. Mortgage debt didn’t rise at all in the Corset years of the 1970s. From 1979 to 1987 it grew at 10 per cent a year. The real problem was not so much the demise of the Corset. It was the failure to replace it with any policy that could possibly hold down house prices as the Niagara of mortgage money roared through the national economy.
Howe wrote in his memoirs that he was only ever lobbied once by his government driver, and then it was about house prices – during the cabinet battle over mortgage-interest tax relief (set at £25,000). That amount ‘would have bought me a small country estate when I first joined the car service’, said the driver.5 House prices had begin to thrill, and the decisions to loosen lending after the 1987 Stock Market Crash accelerated the process. So did the housing-boom years under Tony Blair and Gordon Brown.
Now, you need double the average national income to buy a two-bedroom flat in Tower Hamlets in the poverty-stricken East End of London. As I write, average house prices in London are around £408,000, over fifteen times the average income. Anyone buying a house in the capital for the first time will need to cobble together a deposit of £100,000 and still have a salary of over £87,500 to get the mortgage.6 No wonder there are 800,000 people in London waiting for affordable or social housing.
I am acutely aware now that my 1986 purchase (£45,500, which I eventually sold for £225,000 two decades later) was also a kind of lifeline. If I had bought ten years later, certainly twenty years later, I would now be paying ruinous monthly mortgage interest payments which would seriously restrict my choice of what I want to do in my mid-fifties. I would be forced to concentrate on the handful of jobs that would allow me to earn enough to service my mortgage, assuming I could find one.
Of course, there is a range of experimental shared ownership schemes on the market – part rent, part mortgage. These make buying a home just a little easier, though they are few and far between. Ironically, these are very similar to the Homebuy schemes of the early 1970s, which were used as evidence back then that the domestic mortgage market was too restricted. Now it isn’t restricted at all – if you have a deposit – and we are back to square one.
The Conservatives having won the election in 1979, Howe moved into a second-floor office of the Treasury, which was carpeted throughout, under the Treasury’s exemplary and parsimonious regime, in red lino. There was a plaque above his desk explaining that the Air Council had met there throughout the war. There is some irony in knowing that Howe’s decisions were taken in the very room where they had planned the carpet bombing of German industrial cities four decades before.
Howe was a peculiar mixture too. His bank-manager spectacles and quiet speaking style gave him the appearance of caution. His long-term Labour opponent Denis Healey nearly ruined Howe’s career, during a Commons spat, by describing himself as having been ‘savaged by a dead sheep’. This belied the reality. In fact, Howe was a serious radical, according to the political columnist Edward Pearce. ‘If you listened to Sir Geoffrey for his oratory, you would hang yourself,’ he wrote. ‘The man is absinthe masquerading as barley water. Like the good lawyer he is, Sir Geoffrey uses tedium like cuttlefish ink to obscure the news.’7 Lawson, the new Chief Secretary to the Treasury, was rotund and frighteningly confident. Together, they made hay of the old guard at the Treasury. The permanent secretary Sir Douglas Wass was sidelined and new advisers were brought in.
The key problem, as the Bank of England governor Gordon Richardson explained within days of the election, was how to bring down the value of the pound. The unspoken assumption was that doing so in the wrong way threatened a disastrous run on the currency, but Richardson’s remarks seemed to the revolutionaries like the green light to lift exchange controls. Howe, Lawson and Ridley met at the Conservative Party conference in October and decided there was no middle way. They would go ahead and stop controlling who could take money out of the country.
All they had to do was persuade Margaret Thatcher. Again, later reputations are not a very good guide for understanding the time. These were the days before ‘Thatcherism’. The trio of revolutionaries were still not quite certain of her support for economic deregulation. They knew that, when Edward Heath was leader, she had opposed the sale of council houses and anything else which risked raising mortgage rates. What they did know for sure was that, whatever happened, she was on the side of the middle class. The Conservative manifesto had promised ‘to support family life, by helping people to become homeowners’. There had certainly been nothing about deregulating the mortgage market. Only weeks after the election, she was writing notes to Howe: ‘I am very worried about the reports in today’s press that mortgage rates may have to go up within days. This must NOT happen. If necessary, there must be a temporary subsidy.’8
The very last thing Howe and Lawson wanted was a subsidy, temporary or otherwise. They had set their faces against any such thing. There was a gap between the Prime Minister’s absolute commitment to middle-class homeowners, and their convictions about economic change, which is directly relevant to house prices today. Political mythology suggests that it was Lawson who persuaded Thatcher that a ‘property-owning democracy’ required people to go into debt – which definitely meant changes to the mortgage market. Maybe that conversation happened at the same party conference. No one is saying.9 What we do know is that she was persuaded.
What the revolutionaries didn’t do was talk to the cabinet. ‘Do you know,’ Howe told a dinner party a few weeks later, ‘there hasn’t been a single economic discussion in the cabinet since this government came in.’10
That wasn’t strictly true, but it was quite right that the cabinet was never consulted about the end of exchange controls. They were informed. The critical moment came about mid-morning on 25 October 1979, when Howe explained to the cabinet what he was about to announce. Mrs Thatcher was apologetic, recognizing that ‘some other members of the cabinet might have liked to have an opportunity of expressing their views before a decision was taken’.
Only one voice was raised against. The then Environment Secretary Michael Heseltine warned that people might respond by taking their money out of the country to buy villas in France. But, again, we only have Lawson’s word for this.11
Howe and Lawson had calculated that, despite the worst fears of their critics, there would be no catastrophic outflow of funds, nor a collapse in the value of the pound – for the same reason that the economy was in crisis. Because of North Sea Oil, the pound was now a petro-currency. So they took a deep breath and hoped for the best. The announcement was made and, to their surprise, the pound kept on rising. It carried on doing so until Britain’s exports were unaffordable abroad and UK manufacturing industry staggered, and – hopelessly outdated, under-invested and beset by insane labour relations – all but gave up the ghost. But that, as Kipling might say, is another story.
The decision to abolish exchange controls was a defining moment for the rest of the planet, which rapidly followed suit. It cleared the way for the modern world, where national spending decisions are kept in check by the vigilance of global money markets which can, and do, bankrupt nations overnight. The huge bureaucracies of exchange control were certainly hard to justify, but then so are some of the results of their disappearance. As much as $4 trillion a day now churns through the world financial system, most of it foreign-exchange speculation. It is a terrifying, uncontrollable and largely unpredicted force in modern affairs.
But Howe had also made a brave and imaginative decision. He and Lawson wanted financial discipline and some encouragement for British companies to invest abroad, and they got it. Those involved in the decision to end exchange controls made a special tie to commemorate it, which said ‘EC 1939/1979’. Lawson wore the tie later to deliver his budget speeches