A rigged game of give and take

Lending Strategy April 2010

As was widely predicted chancellor Alistair Darling doubled the Stamp Duty threshold for first-time buyers in his Budget.

Any first-time buyer buying property up to £250,000 will not be liable for the tax and the move will be funded by an increase in Stamp Duty to 5% on properties over £1m.

It’s a shame this move only applies to first-time buyers because that being the case, it may be ineffective in kick-starting the mortgage market.

Removing the levy from first-time buyer properties is a step in the right direction but it doesn’t address the real issue - first-time buyers simply can’t borrow enough cash to purchase homes.

Affordable loans are still not widely available for anyone without a huge deposit and a perfect credit rating.

Quantitative easing has not increased the availability of affordable credit so I suspect this Stamp Duty move won’t make much difference.

Of course, very few will benefit from it anyway, but the government will reap substantial rewards from the increase to 5% on properties over £1m. In fact, it will be quids in.

I had to laugh at a comment made by a Mortgage Strategy Online reader recently. They wondered how many MPs will suddenly become first-time buyers next time they are fiddling their expenses on their second homes. And there is indeed a serious question over how the chancellor expects to police the move.

In his pre-Budget report in December he said the Stamp Duty holiday would not be extended beyond the end of 2009. The holiday increased the threshold at which buyers paid Stamp Duty from £125,000 to £175,000.

It’s interesting to note that the Council of Mortgage Lenders has estimated that if the £250,000 threshold had existed in 2009 92% of first-time buyers and 69% of movers would have been exempt.

The trade body also says that approximately 350,000 households - including cash buyers - could benefit this year at a cost to the government of £630m.

Increased demand at entry-level can help to strengthen prices throughout the housing market but this requires mortgage finance.

Some ideas have been put forward. For example, if state-backed banks were forced to provide products that take lodger income into account the average first-time buyer could access an additional £11,000 according to Easyroommate.co.uk. This could make a big difference.

The website points out that flatmate mortgages would offer a lifeline to first-time buyers without leaving the government out of pocket. It’s possible that this could kill two birds with one stone.

It would provide a leg-up on the housing ladder while boosting the supply of affordable housing for young people by increasing the stock of flatshares.

Not only would the extra cash help them buy their first properties faster, they’d be sharing bills and thus living more cheaply in the meantime.

According to Easyroommate, someone earning the average salary of £26,000 can borrow between £47,600 and £65,40. But if lenders included the £4,392 annual income the average home owner could earn from renting out a room this would rise considerably.

By allowing 2.5 x this income to be borrowed flatmate mortgages would allow the average borrower access to an extra £11,000.

The government can’t win
Meanwhile, Tory leader David Cameron has slammed the government’s economic plans, saying all Labour has achieved is debt, waste and taxes.

And speaking after Darling’s Budget presentation Cameron told MPs Labour had previously rubbished his party’s plan to cut Stamp Duty. He pointed out that the centrepiece of the Budget had been pre-torpedoed by a Treasury minister, quoting the economic secretary as saying that raising the Stamp Duty threshold would not be an effective use of public money.

“First they denounce it, then they embrace it,” Cameron boomed.

And even more predictably Liberal Democrat leader Nick Clegg lambasted both big parties for making lots of noise and showing “no honesty”.

He criticised Darling for only slightly modifying his overoptimistic growth forecasts and described tax changes as a gross disappointment.

So the government can’t win. Until the housing market is back on its feet everyone will be critical, and rightly so.

Although the recession is not necessarily the government’s fault it has dragged its feet with regard to getting the housing market back on track.

The Stamp Duty initiative should be welcomed but at the same time kept in context. This small measure became the centrepiece of the Budget. It’s pretty worrying if this is the best the government can come up with, and perhaps a sign of the serious financial constraints within which it is forced to operate.

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