What makes the exchange-controls decision important here is that it made the controls on bank lending impossible to sustain. Sooner or later, overseas banks or offshore branches of UK banks would start bypassing the Corset. Sooner or later, the Bank of England feared, they would start lending money for mortgages and push up the price of houses.13
So it proved. Fast-forward nearly three decades, and there was Sebastian Cresswell-Turner writing sadly in The Times about the discovery that he could no longer afford the life his parents had. ‘The poor aren’t the only ones who are getting poorer,’ he wrote, describing the effects of twenty-seven years of accelerating house prices. ‘Whole swathes of the professional classes are too’:
An unmarried and badly paid knowledge worker, I live in a rented room in Hammersmith and have no hope of ever buying a home anywhere. Indeed, when I return to the agreeable parts of central London that I know so well from earlier periods of my life, I realise that I am looking at the attractive stucco houses in just the same way that a tramp looks through the restaurant window at a group of people enjoying a carefree meal. I am effectively an exile in the city where I was born.14
When Howe became Chancellor, and despite the two blips during the 1970s, house prices were being kept low by another strange institution that the Corset made possible. This was the building societies’ ‘Cartel’. Because the banks were kept out of lending people mortgages, the building societies were allowed to get together and keep interest rates much lower than they were in the mainstream lending market. They were only allowed to lend out money that people had deposited with them. Because of this, mortgages often had to be rationed. There was a waiting list, sometimes for months. It was inconvenient, and it is hard to imagine mortgages being rationed these days, but to some extent it worked.
The Cartel was presided over by a joint committee of building societies, regulators and ministers, whose task was to set an interest rate low enough to keep the house builders building, but high enough to stop house prices rising. The first step in its demise was when Lawson, as Chief Secretary to the Treasury, refused to provide new guidelines for an interest rate. He said afterwards that he didn’t realize he had to. Without the interest-rate guidelines, there was no point in a Joint Advisory Committee.
‘It was the first step in what was to become a far-reaching programme of financial deregulation, with consequences – some of them wholly unforeseen – which were to have a major impact on the course of the economy and the conduct of policy,’ said Lawson later.15
The joint committee limped on until 1984. Once again, it all depended on the Corset and – now that exchange controls had gone – the Corset could not stand. For months, the stockbroker Gordon Pepper had been saying so. The new ministers set great store by Pepper and copied his speeches to each other. Peer into the cabinet papers of the day, now they are publicly available, and you find Pepper’s speeches everywhere.
The pressure was also on from the Labour opposition. Denis Healey rose in the House of Commons, only three weeks since exchange controls were lifted, taunting Howe about giving people the ‘unhappiest Christmas ever’.16
‘How long will he and his colleagues allow the nation’s eco-nomic prospects to be ruined by a bunch of bumbling doctrinaires?’ Healey went on. The Labour benches roared their approval behind him. Then the killer blow.
‘Why on earth has he kept the Corset still in place when it is well known throughout the banking community its worth is useless now that he has abolished exchange control?’
Even the Wilson Committee, Harold Wilson’s final act in frontline politics, and packed with trade unionists, recommended that it should go. So did Lord Young of Dartington, the author of the 1945 Labour manifesto, who urged its abolition in a letter to The Times.
But there was another consideration. The new cabinet was determined to expand the homeowning classes by selling council houses to their tenants. It was a bold and populist move, designed also to tackle the patronizing record of the big cities in designing and managing council housing – but implemented disastrously (the money earned from the sale just sat there, and wasn’t used to build new low-cost housing). For tenants to buy their own homes, even at discount rates, the means to borrow the money had to be available to them.
There was really no contest, and Howe gave the Corset six months and confirmed the deadline in his budget speech in March 1980, an event that was threatened by the loss of the famous battered red budget box at the Treasury. The box turned up at the last minute and Howe rose to deliver what the Labour leader Michael Foot called a ‘no hope budget’.
‘The Governor and I have agreed …’ he said. The Labour MPs opposite roared with laughter. For a moment, it sounded as if this was a peculiar and deferential way of referring to Margaret Thatcher.
Howe kept his cool. ‘I am referring not to any foreign or outlandish figure but to the Governor of the Bank of England. We have agreed that the supplementary special deposit scheme – generally known as the Corset – should not be extended beyond mid-June, when the present guideline ends. One of the effects of the Corset has been to encourage the development of credit channels just outside the banking system …’
This is certainly true. Once exchange controls had gone, there really was no way under the system as it was then to prevent money from abroad flooding into the UK property market. It certainly did, which is some explanation why 900,000 more households are renting in the UK than they were in 2005.17 It also explains why Britain now lies behind Romania and Bulgaria for its percentage of homeowners, and why only half of London’s homes are now owner-occupied.18 It explains a little why London is rapidly shifting from property-owning democracy to a city of supplicants to the whims of landlords and rental agents.
There are many people who might welcome that kind of shift, towards a society less obsessed with owning our own homes. But renting is really no escape from high house prices, because they feed straight into high rents, and a third of all mortgages in 2006 were for buy-to-let homes. The cost of servicing a mortgage provides a kind of basic floor for rents too, which is why so many people in successful jobs remain trapped in flatshares, sharing the bathroom, well into their thirties and probably beyond. The newspaper columnist Owen Jones complained on Twitter about London rents (£1,000 a month for a two-bedroom house in inner London). Hundreds of people responded with their own horror stories – a 35 per cent rent hike imposed after Christmas, a couple who had to abandon their ‘tiny flat’ in Zone 3 after their monthly rent went up from £720 to £950.
A recent report by the National Housing Federation predicts that average London rents will rise by 50 per cent, to over £2,000 a month, within ten years, that the average London home will rise to £688,000 by then too.19 Nobody believes that average wages will match that rate.
It is easy to blame the landlords for this, and there is certainly greed and opportunism involved, but the real difficulty is that the level of rents depends on the level of mortgage repayments. That is what landlords need to charge to pay the mortgage. It isn’t enough to condemn our ‘addiction’ to property ownership (actually, I don’t have a problem with people owning the place where they live), but the costs of private renting are actually driven by high house prices in just the same way that mortgages are.
So when it comes to imagining how our children will house themselves, it isn’t enough just to abandon home ownership. Private renting will make them just as dependent on high house prices, without the independence that ownership brings – miserably dependent on the whims of landlords, forced to move constantly, without the local roots that their own children – anyone’s children – need. If independence is the new hallmark ideal of the middle classes, it is hard to see how it can continue except for the few – the only children who inherit, the children of those in financial services, the heirs and successors of the One Per Cent.
Were we dreaming when we allowed our hearts to leap at the signs in the estate agent’s window? When we cashed in the rise in house values with loans to fuel the consumer boom? When we got so into