Things started to go wrong with the housing market in 1987, when the then Chancellor of the Exchequer, Nigel Lawson, removed exchange controls, allowing foreign money to flow in/out of Britain without Bank of England approval.
Lawson shouldn't be blamed for this, because it had to be done for a variety of reasons. However, it did allow foreign banks to enter our mortgage market, massively increasing the amount of money entering the market. This created huge competition between the banks and the Building Societies to lend money to house buyers, and they soon started to increase the traditional lending multiples which had hitherto stood at about two and a half times salary. In the early eighties, only the Building Societies tended to provide mortgage funds. British banks entered this market a little later.
There were two main reasons why house prices in the past were kept in check. These were, salary lending multiples were rigidly enforced and, only depositers money could be loaned out, so this set a limit on the amount of money available. Every five years or so, there would be a step increase in house prices to catch up with inflation, which was generally running quite high and would be reflected in higher wages and salaries. Interest rates, at the time, weren't a particularly significant check on house prices.
After the late nineteen eighties boom had fizzled out, largely because people had been able to borrow far too much, rising interest rates started to become a significant factor.
Another significant change then took place in the housing market, as people started to see their homes as investments rather than places to live. At this time, the lenders ceased having to rely on depositers money, they now started to borrow on the money market itself, consequently, there was an almost unlimited amount of money, particularly from the Far East, to fuel the mortgage market. One lender borrows 75% of their funds on the money market.
From roughly 1997, the time New Labour came to power, interest rates started to move toward a forty five year low. Now, over their tenure of office, given that house prices were already well valued and, most importantly, wage and salary inflation was muted, we have still witnessed a huge x3 increase in house prices. Today, values are, ludicrous.
The MPC (supposedly independent of Government) during this period, have pursued a low interest rate policy, and they, together with the Government have watched by as house prices hit the roof. Lets not forget that Gordon Brown vets each person appointed to the MPC committee, he also sets the inflation measure that the MPC has to target. It was a newly created measure, which leaves out many key prices, and is much lower than the RPI. It was also no part of the MPC remit to target house price inflation. They were required to focus on price stability and support Government policy. Interesting that they have now, belatedly, started to focus on house prices. After the damage has been done, that is.
Now, it doesn't take a genius to realise that massive house price inflation and very low interest rates, were bound to create a wealth effect, massive borrowing against house price equity and on credit cards. Hey presto, an instant booming economy, and the Government looks good, and gets re-elected, twice. A similar thing happened in the USA and other countries, such as Australia. The wealth creating Far East had lots of money spare, even after funding the USA fiscal deficits. As the questioner points out, Gordon Brown, in addition to appearing to benefit from the spending boom, makes a massive tax grab from stamp duty and inheritance tax. It appears to be all win.
The Government have also been fortunate with inflation, because they have enjoyed cheap products from the Far East, which partly offset the effects of a spending binge. They have always received plaudits for their control of inflation, however, all that has happened is that it has moved elsewhere, namely, house prices and public sector expenditure, which hits us in the form of taxation.
Where are we now?. Houses grossly over-valued, (a significant correction would be a good thing for the medium to long term) massive credit card debt, and the same in the US. It was inevitable that, eventually, massive house price increases would feed through to inflation, which is where we are at right now, waiting for the inevitable negative effects to feed through. Is that one of the reasons they can't wait to pack us off to the EU?
The Government have wasted much of the additional tax take resulting from a booming economy by, for example, pumping it into an unreconstructed NHS, and by huge expansion of the Public Sector. (buying votes, in other words)
I still believe that the MPC are terrified of raising rates, because it might cause a house price slump. Lets remember, that the vast majority of house owners are sitting on a significant capital profit. What about young people who can't get on the housing ladder, and people who have to rely on fixed incomes having had to suffer years of low interest rates. The MPC have helped create a nation of borrowers and, as some of them seem to want to, hold interest rates, they will encourage even more irresponsible borrowing. They have to kill off the housing market and frighten people away from silly borrowing, even if they don't expect inflation to take off. They have helped create this mess.
Incidentally, I take reports about house price inflation from the lending agencies, and other vested interests, with a huge pinch of salt.