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Blowing up flats but still in the red

I'M not exactly sure how you demolish a tower block "with dignity", as the former MSP Carolyn Leckie demanded of the condemned Red Roads.

She objected to the remaining Glasgow skyscrapers being blown up "for entertainment" as an opener for the Commonwealth Games in July. But few tears will be shed for those damp and overcrowded monstrosities, riddled with asbestos and social problems. And if it is creative destruction, why not?

However, I agree with the critics that there is a certain lack of taste in making a spectacle of demolishing homes in the middle of the worst housing crisis in half a century. We have come full circle since developments like the Red Road flats were built to solve Glasgow's overcrowding problem after the Second World War. Once again, families are being crowded into cramped flats, forced either to pay extortionate rent or burden themselves with mortgages that turn them into housing serfs.

At least there was a degree of social optimism about the great slum clearance programmes of the 1950s and 1960s; a determination never again to allow people to be placed in servitude to landlords and banks. Social housing was supposed to give people of all classes a decent start in life and council building made considerable economic sense. It employed workers and businesses and, by reducing housing costs, allowed people to spend more in the shops. The consumer boom of the 1960s would have been impossible if people had still been spending most of their money on slum rents.

But, again, we have a toxic combination of excessive housing costs and economic recession; falling wages and rising rents. House prices are rising by double digits in Aberdeen and Edinburgh, London and the southeast. It creates huge anxiety among those left behind. Families are spending more than one third of their earnings on housing.

But wait a minute, say politicians like the Tory Housing Minister Kris Hopkins: this housing recovery is a good thing for the economy. It creates wealth, gets people moving and boosts consumer spending in Ikea and Homebase. House prices crashed after 2008 and are still considerably below their peak, he says, and a lot of homeowners were left in negative equity for years. And if people didn't have the money, they surely wouldn't be buying.

In fact, it's not at all clear they do have the money. This housing bubble has been inflated largely with Government cash. The year-old Help to Buy scheme and others like it in Scotland have used public money to give buyers an offer they can't refuse: the funds to meet their 20% deposit on homes worth up to £600,000. This feeds straight into the market, like crack cocaine, boosting prices by 15-20%. It is why estate agents like Savills are so confident house prices will rise by 18% in Edinburgh in the next two years.

Defenders of the policy insist that it helps only a small proportion of homeowners - but that isn't the point. It increases house prices at the margins, and that moves the rest of the market relentlessly upwards. Help to Buy is a financial leverage scheme that creates exaggerated price effects from relatively few transactions.

All governments try to buy election victories by stoking up economic booms, but this must be the most blatant attempt to buy votes since the days of the "rotten boroughs" before the Reform Acts. And it constitutes a transfer of wealth from working families to the banking aristocracy and landlords.

House-price inflation does this in three ways. First, because house prices are rising, landlords can put up rents, which have been rising much faster than before 2007. Secondly, banks harvest the interest from loans given to homeowners, which is distributed through bonuses and inflated salaries.

Finally, the inflation of house prices concentrates wealth geographically in post code asset stores. In the London borough of Kensington and Chelsea, average house prices are now over £1.5 million.

Houses in inner London constituencies are wealth machines, generating tax-free capital gains of tens and hundreds of thousands of pounds a year - wealth that funnels upwards from the middle-class families struggling to buy a roof over their heads. In Scotland, there were only 151 houses sold at £1 million-plus in 2012, and one-third of those were in Edinburgh. In central London alone, more than 6000 houses sold for £1m last year. That's £6 billion worth of property under the hammer.

It can't go on indefinitely, of course, as even Business Secretary Vince Cable explained last week. He said that houses were "not nearly affordable" for middle-class people, and prices cannot rise faster than earnings for much longer. But they don't have to. The smart money will be getting out of property the moment the votes are counted after the 2015 General Election. That's when interest rates will start to rise, as rise they must, putting a lot of poor homes under the hammer, as over-stretched families find they can't keep up the payments.

It may seem incredible that a government could actually want to stoke up another house price bubble so soon after the last one burst with such massive impact. It was excessive lending by banks and building societies, like Northern Rock with its 125% mortgages, that caused the 2008 financial crash. Hundreds of billions of pounds' worth of loans went bad, and had to be taken under the charge of the taxpayer. The Bank of England's rescue required a total of more than £1 trillion in financial support to banks like Lloyds and RBS to prevent them going bust.

But the damage was long-lasting. The credit crunch that followed the banking collapse led to the Great Recession as banks simply stopped lending. That was a five-year long retrenchment that left British families £1600 a year worse off. The Government's austerity programme deepened the recession by cutting spending when the economy was deflating, and it is only now that the election is looming that the Coalition has turned, in desperation, to policies that boost growth - though not very sensible ones. George Osborne has been trying to get older people to spend some of their pension cash by scrapping the annuities rules, as well as taking to subsidising mortgages.

Vince Cable says the market will only achieve balance with a massive housebuilding programme. Yet the solution to the problem is there: public housing. The private sector is incapable of mobilising the kind of effort needed to build the 300,000 houses a year that Britain needs. Only the state is capable of getting this kind of programme off the ground, and it is surely a better way to use public money than shoring up the bad debts of the banks.

It will come - eventually, after everything else has been tried. And it may even be Conservative governments that revive housebuilding, just as it was Conservative governments in the 1950s that promoted slum-clearance programmes. Then we will start to see the next generation of Red Road housing estates being built, though hopefully while learning from the structural mistakes of the past.

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