I agree the mother is a twat but am also interested by the question asked - what did OP think of council flats before she had to live in one?
Because, I think the twatty mum's question: "How on earth did you end up living here?"
Is answered perfectly well by the Op's reference to: "when we lived near the school in the lovely house we used to own before I got ill and everything went tits up!"
Therefore there is a story here and a reason for the mum to ask, although obviously she did it in the most dim, ignorant terms. But those who've picked up on the OP's own feelings about where she lives now are onto something I think.
This doesn't seem like some cut n dried case of OP not having any problem with where she lives. Clearly she does, and would go back to the lovely house in a heartbeat, understandably. So apart from fact that OP was probably dumbfounded by the shock of the question, it seems like this was a prime opportunity to debunk the mum's idea that there is such a thing as a council estate stereotype. "Well, I was just like you and then..."
The mum may still blank her, from some deep-seated fear that there's no difference between those people on the estate and her nice people after all. It's hard not to give into that fear - why do you think people pay for private education, move for 'nice' schools, and try like hell to get out of some estates?
I think it's worth acknowledging, as someone said about the untruthfulness here, that this fear is very deep in many many of us, evidently including the OP. We seek out our own and fear difference and have to actively make ourselves combat this, which can be hard where our PFBs are concerned, and way easier to stick with 'safety'. I'm not saying it's right, but it's daft to think it's not the prevailing mode.