The credit crunch has suddenly exposed many failures of unregulated free markets. But to my mind, it is the structural problems of the housing sector that have been most starkly illuminated.
The US mortgage market lit the fuse for this economic explosion, as banks gave out mortgages to people who couldn’t really afford to pay them back. The credit crunch originates in the myriad of debt repackaging to lay off these sub-prime mortgages.
Now it has come a full circle, with people struggling to pay their mortgages or people without homes paying the price at the sharp end.
The government has always assumed that the private sector would, in large part, provide the solutions to housing need. If that assumption was always doubtful, it now seems simply laughable in the face of empirical evidence demonstrating a collapse in private sector provision.
Consider the basic facts on new housing provision. The government wants to build 3 million homes. Its stated aim is for output to reach 240,000 a year by 2016 and that implicitly assumes that construction will slowly increase in the meantime. Yet construction peaked at 230,000 new starts in 2006 and 170,000 new units completed in 2007. Those years now look like the exception. Over the May/June period this year new construction was down by half on last year, and by August the year-on-year decline was over two-thirds.
Even optimistic projections are of 100,000 new homes being completed this year while new construction stalls. Next year some analysts assume virtually no houses will be built by private sector.
Next consider the statistics on need. There are an extra 220,000 families in need of housing every year - we live longer, we live separately and, especially in London, there is net inward migration. Government targets were based on the Barker review, which in turn was based on earlier, lower estimates of household growth.
Looking at purely social need, the picture is even worse. About 1.75 million households (around 4 million people) are currently on the housing allocation and transfer lists. Estimates suggest some 5 million people could be in need of social housing within seven years as the full housing crisis shakes down.
The government’s modest target of 45,000 new social units a year by 2011 was based on the assumption that 10,000 extra units of affordable rented accommodation a year would be provided by the private sector.
Yet all the indications are that the depressed market for housing purchase and sales, combined with the halving of new construction, will lead to market rents rising rather than falling. There can be few informed observers who think even these aspirations for new social housing meet the reality of public need.
Historically, there used to be a genuine mixed economy in housing. In the 1950s and 1960s the state regularly provided some 200,000 units a year through local councils, while total house building reached 350,000 in 1968.
This has now ground down to virtually nothing. Housing associations have managed to hold their own but will not be able to pick up the slack left by the private sector.
Local authorities now manage to build only a few hundred council homes a year. Even before the recent decline in private sector output the developers preferred to focus on the more lucrative top end of the market in new homes for sale. The outcome is that barely 150,000 units have been built in most recent years.
Until the crash house price inflation sustained the credit bubble, even while the number of households in need of housing grew almost exponentially. We have all been speculating against housing instead of viewing policy in terms of developing homes for people to live in.
House builders show signs of having over-extended themselves in the good times. Barratt’s acquisition strategy has left it £1.65 billion in debt - just slightly less than the net debt of rival Taylor Wimpey. The latter’s share price has fallen from 518p to 11p in barely a year. Crest is in protracted discussions with its bankers.
The banking sector crisis is quietly being replicated in the housing sector, the two are intrinsically linked. Many of the now part-nationalised banks have considerable stakes in developers.
There is no policy status quo. The state must step in. An emergency public sector house building strategy is a pragmatic, rational response. This might well mean a public stake in some of the house builders themselves, to recapitalise the sector and to force them to act.
Local government must also directly step in to fill the space vacated by the private sector by building houses itself. If councils had the same freedom to borrow off their future rent income as other social landlords, they could lever in immediate funds without even requiring an injection of Treasury cash.
There are other policy tools available, such as the planning system, if the government recognises that the scale of the problem requires a new radicalism in the field of housing.
In short, as the nature of risk is being fundamentally recalculated across western market capitalism, the link between market and state must be consequentially redrawn.
Nowhere is this more acute than in our domestic housing market. This has dramatic implications for the government - the question is whether it has the political will to act.
Jon Cruddas is Labour MP for Dagenham