All sectors of the troubled UK housing and mortgage market are continuing to experience major structural difficulties. The government recently announced a rescue plan has been dismissed as too little and too late by economists and industry stakeholders. Yesterday, the Chancellor announced that the government is raising the stamp duty threshold to £175,000. This means that for the next year first-time buyers, purchasing properties under £175,000 will not have to pay stamp duty. This measure is to replace an existing one in which buyers pay 1% stamp duty on properties worth over £125,000. Homebuyers will save a maximum of £1750. With house prices falling at an annual rate of to 10% a year, this incremental tax saving would be wiped out if the average decline continues at it’s current rate. Blocks of flats are reducing in price, faster than any other property type, while the prices of larger, more expensive the family homes (such as listed buildings), are falling at a slower rate.
The average price of a house in the UK is approximately £170,000 (based on analysis by Halifax and nationwide). This means that the new measure may not benefit a large number of buyers. The Council of mortgage lenders said: “it is questionable whether it will incentivise buyers who wouldn’t have entered the market anyway”. While the Royal institution of chartered surveyors said: ” the government has failed to listen to the property industry and respond to market pressures and the proposed measures will have little impact on those suffering as a result of the current crisis.” The government estimates that half of all property transactions for homes are homes worth less than £175,000, which will mean about half a million people will benefit from the new measure.
It appears this tactical move is aimed at helping struggling first-time buyers and lower income prospective homebuyers, as opposed to attempting to reverse the collapse of the housing market. Mr Darling said: “we are facing difficult times – we are in a situation where you are facing the combination of a credit crunch with high oil and food prices. We haven’t seen this since the 1930s. I believe the package we have announced today will help us get through what is undoubtedly a difficult time. I am optimistic that we will get through it”. Despite news reports that mortgage approvals are down 71% compared to this time last year, plus the collapse of the pound the day before and a shocking report by the OECD that the UK is now the only country of the world’s major economies to be in a technical recession, the Chancellor remains optimistic.
The refreshing honesty and clear language used by Chancellor in an interview with the Guardian on Friday had created a media storm in a teacup, as the’on message’ and tone of his summary of the state of the nation’s finances, differed largely from that of the government. He was accused of talking down the economy. The stamp duty measure is likely to cost the Treasury £600 million which is an unbudgeted sum and will impact spending in other areas (or more likely have to come from additional government borrowing). Any help is clearly welcome and needed for attempting to revive the property industry, (which is making massive redundancies across construction and associated homebuilding trade’s).
It appears that the government is largely powerless to deal with the underlying structural problem of a decade of overinflated house prices, coupled now with a strangulation of credit and liquidity across the world. In the UK, the Government encouraged a free market that allow buyers and sellers of homes to agree prices based on market equilibrium. Hence, borrowers stretched themselves for over a decade and are now having to correct their expectations with regards to what is a realistic price for a home and how much money they should reasonably be allowed to borrow without stretching themselves. During that time of ‘stability and prosperity’, the Government took billions in stamp duty receipts, as well as borrowed heavily for public spending, meaning very little is left to make any significant impact on the housing market. Back in 1991, a similar suspension of stamp duty by the Conservative party did very little to change the impact of the housing crash at that time.
Government has also attempted to intervene in the housing market by offering banks liquidity. According to a UBS analyst, it is possible that high street retail banks may have already borrowed £200 billion worth from the Special Liquidity Scheme, set up by the government. The aim of the scheme is to provide a Bank of England emergency fund to swap questionable tradable mortgage securities for liquid Treasury bills over three years. This has given struggling mortgage lenders the liquidity they need to then sell mortgages into the market. Despite this lenders are reported huge losses and approval numbers are down as they shy away from risk. Lenders have continued to become more risk averse as the crisis has worsened. For instance, they have tightened up on the number of interest only loans and the lending criteria offered to borrowers. This is to stop borrowers getting themselves into negative equity. The Woolwich has restricted it’s maximum interest only mortgage to 75% of the property value. Borrowers must make capital repayments on anything above this.
During the boom times, homebuyers relied on continued rising house prices to repay the capital element of the mortgage while servicing the interest on the debt themselves. These interest only mortgages provided a low-cost means for buyers to stretch themselves and buy bigger properties. Today though, lenders are now asking borrowers to explain how they will repay the mortgage in the future. In the past, application forms simply mentioned that interest only mortgages should realistically be supplemented with a endowment or lifestyle policy which pays off capital at the end of the mortgage term.
An additional government attempt to help the mortgage market came this week from the Department of Local Communities and Local Government. It announced that it will offer interest-free loans to first-time buyers (earning less than £60,000) of up to 30% of a property’s value. The loan free period would last for five years on new properties and would be part funded by developers and the government. This new system is nicknamed HomeDirect and would be run in conjunction with large property organisations.
Meanwhile confidence in the buy to let market continues to collapse with news that Bradford & Bingley’s own savers have withdrawn £800 million in just eight weeks. Bradford and Bingley’s savers were obviously concerned that the bank might collapse in the same style as Northern Rock leading to run on it’s finances. Write-downs due to bad debts have wiped out profits. The bank attempted to raise capital by restructuring and offering shares. Investors were scared off and failed to take up the rights issue. Landlords are simply not buying properties in the current climate and increasing number of getting out of the market by pulling their investments up to sale. Meanwhile the property portal Rightmove has reported a large rise in the number of estate agent failures, as the buy to let market worsens. It’s said that the 1300 estate agents offices closed during the first half of 2008 and further closures are expected as the crisis deepens.
Unfortunately, we anticipate bringing you more gloomy economic news in the near future.