Steve Richards: House prices are a ticking timebomb under the Labour government

It is like the mid-1980s all over again. Outside London there is feverish talk about the impossibility of moving to the capital and other expensive cities, or in some cases of buying a house at all. Inside London and some other big cities house owners are counting their fantasy money, although most of them have no intention of selling their homes. At the same time parents ask themselves how their kids will ever be able to afford to live in the same area. They reach the alarmingly macabre conclusion that their kids will not be able to do so until they have died and left a hugely expensive property behind.

Against the expectations of most economists and housing experts house prices are still soaring upwards. The latest figures are staggering. According to the independent Institute of Housing, a salary of more than £30,000 is needed to buy an average-priced house in most of England. In many areas that figure is much higher. The average London deposit for a first-time buyer is now £30,000. That is before the buyer even contemplates the mortgage.

There was a time when political leaders proclaimed such intimidating figures with pride. "Look at the value of your houses," Mrs Thatcher boomed during the 1987 election as evidence that Britain's economy as a whole was thriving. Now the reverse is the case. Instead of being gloriously totemic figures, the unremitting rise in house prices threatens to scupper the Government's main objectives for its already stuttering second term. Housing rarely commands the front pages as an issue, but there is none bigger in terms of the impact on domestic policy. Even Mr Blair's ambition to take Britain into the euro is hugely threatened.

Many acres of newsprint have analysed the battle between Tony Blair and Gordon Brown over whether Britain should join the euro: will Brown stop Blair from joining? Will Blair shout his old friend down and insist on joining? A much bigger obstacle to Britain joining the euro than the obstinancy of Mr Brown is rising house prices. In order for Britain's economy to achieve "sustained" convergence (much the most important of the famous five tests) interest rates will have to fall yet further. Yet the cost of housing is more likely to force the Bank of England to raise interest rates, putting Britain's monetary policy further out of joint with the other leading countries in the European Union. A senior Treasury official told me in 1998 that a significant reason why Britain's economy would not converge with the eurozone in Labour's first term was rising house prices. Well into the second term they are rising further.

The Government's more explicitly declared goal of improving public services is equally threatened. Why be a teacher, a police officer or a nurse in London and the South-east when most of your wage will be swallowed up by a high mortgage? The NHS will be the centrepiece of Mr Brown's Budget in less than two weeks' time, possibly the most important political event in this Parliament. Yet the Government will not be able to make much progress if it cannot recruit nurses or trainee doctors in certain parts of the country because the housing is so expensive.

Apart from jeopardising our chances of joining the euro, screwing the public services, accentuating the divide between North and South, and preventing people from living where they would like to live, the housing market has an even more fundamental flaw. There are nowhere near enough affordable houses for those on low incomes. Until the late 1970s local authorities were building more than 150,000 new homes each year. As part of the destruction of local democracy in Britain councils do not build many new homes. Some councils may have been hopeless at managing their houses, but at least there was some housing to manage. Housing associations are in many cases excellent managers of houses, but there are nowhere near enough homes being built. It is estimated that around 80,000 new homes are required this year. Half that number are being built. Young people and families are struggling to find anywhere affordable to buy or rent, partly because there is nowhere affordable to buy or rent.

Part of the solution is for the Government to actually recognise that there is a problem that needs solving. The Housing minister is buried somewhere in Stephen Byers' traumatised department. Before that he was hidden in John Prescott's almost equally traumatised department. The current occupant of the post is Mr Blair's friend Lord Falconer. This is not a sign that Mr Blair regards the brief as more important than its lowly status suggests. Lord Falconer has been tucked away until media furore over the Millennium Dome calms down. There was a time when Housing minister was a cabinet post. Harold Macmillan made his reputation in the job by presiding over a huge expansion in affordable housing in the 1950s. As recently as the late 1980s the then Environment secretary, Chris Patten, told me he that his department was too big and that Housing and Local Government should have a separate cabinet minister. Instead, we continue to make do with a junior minister.

There is still much that could be done to alleviate the situation. Most obviously, more money should be made available to housing associations and private developers to build new homes. The council tax is regressive, hitting hardest those in the least expensive properties. The tax should be more painful for those living in the houses soaring in price and for those with a second home (where the council tax is heavily discounted). With changes to the council tax comes the related need to revive a municipal culture in Britain, allowing for a greater flexibility in the current rigid planning system so that revitalised councils are given the opportunity to make their areas more attractive for people to live. To some extent the introduction of regional assemblies might make a difference in themselves. Edinburgh property prices reflect the city's new status as Scotland's political centre. England has only one political centre – inevitably in London.

There is something odd about housing as an issue. There are echoes with transport. Neither policy area makes it into the big league of health and education, and yet I find that for all kinds of different reasons people are obsessed with both. As far as housing is concerned, a failure to act will mean rising homelessness, bigger gaps between house prices and incomes, declining services in schools, transport and hospitals ... and not forgetting the euro. Housing is the ticking timebomb that could blow apart the Government's second term.