The housing market’s final props could soon collapse

I spent the early part of Wednesday evening in one of Edinburgh’s smartest restaurants, Oloroso.

Sadly, I wasn’t there to eat. I was there to film for a BBC Panorama programme on the way the crisis in the eurozone is affecting us all.

My job was to make the whole thing visual by writing the big numbers in pink eyeliner on the window, in front of the twinkling Christmas lights of George Street. You probably think that sounds easy. You are wrong.

But my problems with the eyeliner were nothing compared to the problems with the numbers. After all, who can possibly know what the crisis will end up costing us?

Sir Mervyn King, the governor of the Bank of England, put it rather vaguely in the Bank’s last inflation report at 1% or so of GDP. Capital Economics reckons things are a bit worse: it has got UK GDP losing around 1.3% if there is no disorderly break up, and 3% if there is. And Capital Economics’ money is on something closer to the latter than the former.

So you can, I think, assume the losses to us to be being anything from £15bn upwards (£15bn being around 1% of what our GDP is thought to be).

However, the real difficulty with figuring out the impact of Europe on the UK is separating their bad news from our own bad news. You see, the UK doesn’t need Europe to help it back into recession. We can do that all by ourselves.

In his autumn statement, the chancellor made it clear that our economy is going to grow slowly for at least two years (and probably five), while our public debt is caught in an unpleasant upward spiral. We have the kind of debt levels that inhibit growth. But, with no real attempt at proper austerity, we can’t cut debt enough to allow the growth needed to pay off the borrowing. Nasty.

At the same time, the odds of another credit crunch are pretty high, or so the Bank’s Financial Stability Report suggested this week. Our banks have been busy weaning themselves off the government support chucked at them post-Lehmans, which has already made them pretty tight with their loans. Now they have what Capital Economics calls a “tough refinancing schedule ahead”. They have to find something in the region of £140bn of funding next year at a time when the costs of funding are rising.

All this means that they are likely, once again, to cut their lending volumes and to raise the price of the loans they do offer.

The Bank of England, says Capital, has already noticed that “some banks may be starting to pass on higher funding costs to businesses through higher prices” – and says the same is happening with mortgage lending.

You will have noticed, by now, that the eyeliner was something of a pink herring – just a roundabout way of getting back to one of my favourite subjects: house prices.

I said a few weeks ago that only two things were holding up UK house prices in the face of collapsing consumer incomes: forbearance on the part of the banks (changing the terms of mortgages and so on to prevent people ending up being in arrears) and ultra-low mortgage costs.

This week, the scale of the forbearance in the market became clear. According to the Financial Services Authority, 5-8% of all UK mortgages would be in arrears if the banks weren’t scrabbling around looking for ways to prevent it happening. But I can’t see that number being allowed to go much higher.

And what of mortgage rates? If forbearance is so huge at a time when rates are at their lowest for 300 years, what happens when the costs of a mortgage rise? If you were hoping that 2011 was the last year of falling house prices, I suspect you will find next year deeply disappointing.

• This article was first published in the Financial Times