CML news & views

After a month of uncertainty, the government finally clarified its intentions on stamp duty earlier this month when it announced a package of consumer-focused measures to help those most in need as a result of current difficulties in the housing market. 

Unlike some of the other measures unveiled, the higher threshold for stamp duty brought immediate benefit to the market. Uncertainty over the government’s intentions had meant that, since early August, people wanting to buy or sell property had endured frustration and delay. Now, however, they are able to complete their transactions. And some even benefit from the duty holiday.

At a stroke, the proportion of buyers who will avoid paying stamp duty rose from around a quarter to a half. But that, in itself, will not be enough to change market sentiment quickly, or to bring about a significant increase in the number of housing transactions. The shortage of supply of mortgage finance remains the most significant constraint on buying capacity in the market.

Judging by the media reaction to the announcements earlier this month, many share our view that the government’s package of measures, including the stamp duty concession, do not herald a rapid recovery of the housing market. But while market commentators agreed that the impact of the government’s measures would be modest, we believe that they are still helpful. 

Their chief value is that they provide targeted help for those groups of borrowers that are experiencing the most difficulty, the main beneficiaries being first-time buyers and those struggling to pay their mortgage. 

Over time, housing and mortgage markets will improve, although recovery is still some way off. We now eagerly await the outcome of the Crosby review later this month and an announcement of co-ordinated action by the government, Bank of England and the industry to help improve funding prospects. An extension of the Bank’s special liquidity scheme beyond October – or some other mechanism to address rollover funding – is an important element of that.

So, how did commentators react to the government’s package of measures?  Overall, perhaps ministers will be disappointed by their lack of enthusiasm. 

References by ministers to the forthcoming Crosby review failed to deflect criticism of the absence of measures to improve mortgage funding. The scale of the measures was also criticised, bearing in mind the overall size of housing and mortgage markets and the extent to which they have slowed. There was a broad welcome for measures to help borrowers in difficulty, a more critical reaction to incentives for first-time buyers, and confusion about the Treasury’s claims on how much of a stimulus to the market the stamp duty holiday would deliver.

In The Times, Anatole Kaletsky agreed with us, both about the over-riding need to improve the supply of mortgage funding and the mechanism for doing so. “If the government had been serious about supporting the housing market,” he said, “it would have focused on lenders rather than house-builders and first-time buyers, extending to new loans the Bank of England funding now available on old mortgages.

“By offering the Bank of England as a backstop to new mortgage lending, the government would have brought Britain into line with the more generous central banking policies in the US and the eurozone, potentially unblocking the supply of new loans.

“While British banks and building societies lobbied vigorously for this relatively low-cost technical change, the Bank of England opposed it, and the government opted for more ‘eye-catching’ initiatives.”

In his blog, BBC business editor Robert Peston also agreed that the shortage of mortgage funding – and its impact on the cost of borrowing – was the key issue. He thought the stamp duty holiday was “totally irrelevant to what is driving the generalised fall in house prices, which is that banks are much less willing to lend than they were and are no longer offering super-cheap fixed-rate loans.”

The main benefit of the stamp duty announcement was the removal of uncertainty which had blighted the housing market since early August, he argued. But its impact would be negligible, given the forecasts for house price falls in the next 12 months.

Help for borrowers in difficulty was welcome but “can’t possibly change the negative trend in the trillion-pound housing market. How could it do so, given that the Treasury is providing no new money to the communities department?”

In The Guardian, Simon Jenkins was less sceptical about the stamp duty holiday, describing it as a “sound short-term measure which estate agents claim will kick a few thousand deals into play and thus steady the plummeting lower end of the market.” 

He also welcomed the limited help for borrowers in difficulty. “The proposal to ‘nationalise’ equity for some of those facing dispossession is a modest welfare measure. It is a new housing benefit for the home-owning classes whereby a small percentage of debt is shifted to the public purse.”  It was, however, effectively “a means test administered by a new cohort of government ‘money advisers’.”

For Simon Jenkins, the small scale of the measures overall was their chief virtue.  “Faced with what is said to be the greatest collapse in the housing market of modern times, the government has decided to do virtually nothing. In the long run, that was good news for financially stretched home-owners. 

“As a general rule, it is patent that falling house prices are good news for the poor,” he argued. “Only politicians and headline writers think otherwise.”

But while his analysis of the benefits of falling house prices holds true for would-be first-time buyers, the prospects for existing home-owners in poverty may be deteriorating rapidly. Our research has shown that half the poor are home-owners. 

Many of these are pensioners who may have paid off their mortgage and own their property outright. Because of their circumstances, in which they own a valuable asset but have a low income, this group is often described as being “asset rich, but cash poor.” The reality is, however, that in current market conditions, the value of their asset is falling, while their income comes under greater pressure from higher food and fuel costs.

In The Independent, Jeremy Warner described the government’s measures as “too limited and complex to have any meaningful impact.” He welcomed “a social safety net for those who run into genuine difficulties” but the stamp duty announcement was “too little too late.” He recalled that “when Norman Lamont announced a similar tax holiday on house purchases back in the early 1990s, it had virtually no effect on the bombed-out housing market, which didn’t begin properly to recover until some years later.”

But the most forthright of all commentators was Willem Buiter, former Bank of England monetary policy committee member. 

In his Financial Times blog, he concluded that “the only way to restore normalcy to the UK housing market was to address directly the collapse of mortgage financing.”  Moreover, government action was needed because the problem was caused by market failure. 

But he was quick to point out that “normalcy” did not mean a return to the levels of lending in the three or four years up to 2007. “Perhaps 50% of its level in the first half of 2007 is all that I hope for,” he said.

Writing under the heading “A very damp and small squib,” he argued that only the government’s plan to let housing associations help borrowers in difficulty by buying an equity share had any real merit. “Why not, if housing associations are more efficient and more trustworthy that private companies offering ‘sale-and-leaseback’ deals?”

Meanwhile, the stamp duty holiday amounted to tinkering, and much more fundamental reform was required. “Stamp duty is a stupid tax, which penalises transactions in housing. It taxes labour mobility. If the government wants to tax wealth, let it tax wealth, but not transactions in specific assets. A one-year partial stamp duty holiday is better than nothing, but nowhere near as good as a permanent abolition of this fiscal monstrosity.”

He was equally dismissive of the proposed interest-free equity loan to first-time buyers of a newly-built home - “another terrible idea,” he argued.  “Why favour new homes over existing homes?” he asked.

In reality, of course, support from house-builders - with unsold, newly-built properties on their books - is helpful for a government that has limited capacity and resources to affect housing and mortgage markets. Given its limited room for fiscal manoeuvre, the government’s package provides useful, targeted assistance for those borrowers most in need. Most commentators agree, however, that a key omission from its measures is action to improve the flow of mortgage funding.

More crucial than ever therefore - given the limited scale of the government’s measures - is the outcome of the Crosby review. What the market now needs is decisive action to improve the flow of mortgage funding.