Duty calls

29 March 2010

With the general election looming, last week the government delivered a Budget that could have read as a PR bulletin for its campaign as opposed to a solid plan for resurrecting the economy.

But what else could voters expect? This was Labour’s last chance to persuade the public that the party has what it takes to get the country through the economic crisis and safely out the other side.

It was time to pull out the big guns and dangle one hell of a carrot in front of voters’ eyes. But this was never going to be easy - the Conservative Party was always going to come down hard on the government after chancellor Alistair Darling delivered his Budget.

Each year the Opposition has retorted with a blistering attack of criticism and correction. But with an election around the corner this year it was obvious the riposte was going to be even more brutal.

But what carrot could Darling dangle? The answer was the one thing that the housing market, first-time buyers and indeed Mortgage Strategy have been calling for - a reform of Stamp Duty, albeit a temporary one.

Labour did the only thing guaranteed to win public appreciation and avoid damning criticism from the Tories, although it was an initiative that the Opposition had already promised to implement.

Stamp Duty needs serious reform and we urge the government to research how to reduce the price distortions

In his last Budget before the election - and just 73 days since Labour ended the Stamp Duty holiday - Darling announced that he would double the threshold that makes properties eligible for Stamp Duty.

From midnight last Wednesday, for the next two years first-time buyers will not have to pay the tax on any property under £250,000.
The decision, unsurprisingly, was welcomed by the industry - although not wholeheartedly.

The Council of Mortgage Lenders says it cautiously welcomes the decision. But it warns that there will be practical barriers to effective implementation. It says it would be simpler, although more expensive, to make the new threshold applicable to all buyers as opposed to just first-timers.

The CML says first-time buyers typically include a high proportion of those returning to the housing market who have previously owned property but no longer do so.

“Yet the guidance note says that to qualify, the purchaser must not have previously acquired a major interest in a residential property anywhere in the world. It is not clear how this will be verified,” says a statement from the trade body.

The CML estimates that over the coming 12 months there are likely to be 136,000 newly exempt first-time buyers under the new concession, resulting in lost revenue of £224m.

The government says that to pay for this the Stamp Duty on properties over £1m will be set at 5%. The CML estimates this covers around 10,000 properties which could equate to around £250m in additional revenue.

The trade body’s caution over the move is justified as it reveals that 92% of first-time buyers would have benefited from the move had the decision been made in 2009.

But the banking sector approves of the move, says Angela Knight, chief executive of the British Bankers’ Association.

“High street banks currently provide more than two-thirds of all home loans,” she says. “They stand ready to support all buyers, including first-time buyers who might benefit from the Stamp Duty exemption for lower-cost homes.”

Like the CML, the Building Societies Association also welcomed the move, but not without a warning.

“The announcement that first-time buyers will not have to pay Stamp Duty on house purchases up to £250,000 is welcome and will provide assistance to those struggling to get on the housing ladder,” the BSA says. “But this alone will not lead to anything like a housing market recovery and it fails to address the fundamental flaws with Stamp Duty.

“The current slab system results in the bunching of transactions at prices just below the thresholds. Stamp Duty needs serious reform and we urge the government to research how the system could be reformed to reduce the price distortions.”

The National Association of Estate Agents has been more positive, saying the move is a major victory. It says it has long campaigned for a major rethink on Stamp Duty, which it believes to be a tax on aspiration. “For thousands of first-time buyers the dream of getting onto the property ladder was slipping out of reach,” says Peter Bolton-King, chief executive of the NAEA.

“This announcement has added a new rung to the property ladder, one within reach of thousands of young families. We have long argued that Stamp Duty is a tax on aspiration that smothered the natural demand of the market.

First-time buyers are the fuel that keeps the mortgage market alive. If they are happy, the rest of the market tends to be happy

“We still believe that more reform is needed and there is more work to be done but this is a good first step and a major victory for first-time buyers,” he adds.

Trade bodies aside, the rest of the industry’s reaction was on the whole positive.

“Our research reveals that 42% of all people searching for a whole-of-market mortgage adviser last month were first-time buyers, which has remained the number one advice driver since the start of 2010,” says Karen Barrett, chief executive of Unbiased.co.uk. “After the increase to the Stamp Duty threshold we expect to see a further rise in the number of first-time buyers being able to get on the property ladder.

“After a year of economic turbulence, consumers are more aware than ever of the importance of being financially educated. First-time buyers need to ensure they understand the added costs involved in the house purchase process. A whole-of-market adviser can make sure they are guided through the mortgage process and aware of all the costs involved, including Stamp Duty.”

But there were some reservations surrounding aspects of the decision. When the announcement was made that properties over £1m would be charged Stamp Duty at 5% there was a chorus of cheers from Labour, with members waving sheets of paper at the Conservatives as if to imply it was members of the Opposition who would incur this tax most.

But it’s not just Tory MPs who will suffer. Although the CML estimates the government could make £250m off the back of the rise, property portal Zoopla.co.uk says that with just one in 150 homes valued at £1m in the UK, it is a relatively small number in terms of making a decent return.

“Taxing the rich makes a good headline but it won’t raise much money for the government’s fiscal black hole,” says Nicholas Leeming, commercial director of Zoopla. “Only around 3,000 homes sold above the £1m mark in the last year. With the total Stamp Duty tax take reaching almost £3bn last year, this measure will contribute only roughly 2% extra tax, which is a tiny amount.

“Raising Stamp Duty on £1m homes is a cynical move by the government to tax buyers who tend not to be their core voters. The burden will fall overwhelmingly on London and the South-East.”

There was some skepticism surrounding the fact that the threshold still follows the same scale as before, which means properties over £250,000 still jump to 3%, instead of starting with the 1% Duty that £125,000 properties qualified for.

“The Stamp Duty change is a double-edged sword for the property and mortgage markets,” says Paul Hunt, managing director of Phoebus. “First-time buyers will be encouraged to climb onto the ladder and it’s these buyers who give the market buoyancy and help growth. It will also have a positive impact on the lending market. The increase in demand will not be met by an increase in supply. That will support sales.

“But there is the danger that the new threshold will create a vacuum in the mid-market range of properties. Because Stamp Duty jumps from 0% to 3% buyers will be forcing prices down to below £250,000 to save themselves an extra £7,500 of tax.”

Hunt says there will be a similar situation at the top of the market with buyers trying to force prices below £1m to avoid the extra £10,000 on a £1m property, which could lead to another stall in the recovery if buyers maintain downward pressure on prices.

Another criticism of the initiative was its discriminatory nature.

“The chancellor’s move to increase the Stamp Duty threshold to £250,000 is great news,” says Alan Cleary, managing director of Exact.

It would have been even better had this not been restricted to first-time buyers. The last Stamp Duty holiday helped buy-to-let investors too so was therefore more powerful. But anything that helps the wider mortgage market retain some of its momentum is welcome.”

While the Stamp Duty move was widely welcomed, albeit with trepidation, there was one thing most in the industry agreed on - it was by no means a panacea.

Alison Beech, business relationship director at Spicerhaart, says the increase in the threshold is fantastic news for the lower end of the market.

“First-time buyers’ prospects have on the face of it improved greatly with this new tax break,” says Beech. “But mortgage availability for those without a sizeable deposit remains challenging. A significant and sustained recovery will only be realised when the market is able to be more competitive and boost LTVs.

“Improving mortgage availability and affordability will give further support to buyers and allow the market to get back on track.”
David Whittaker, managing director of Mortgages for Business, is of the same school of thought.

“The property and mortgage markets are like a steam engine, they need fuel to keep the fires burning and the pistons pumping,” he says.

First-time buyers are the fuel that keeps the mortgage market alive. As long as they are happy, the rest of the market tends to be happy. The new 5% Stamp Duty rate on £1m properties is a sideshow. Increased demand at the entry-level end of the market helps to strengthen prices. Increasing prices means investment in property.

“But all this requires mortgage finance. The problem is that without injections of new finance and a dramatic increase in competition in the mortgage market, lenders will be able to maintain high rates and many would-be buyers will still be left out in the cold.”

But Whittaker, Beech and the rest of the market may not have to wait as long as might have been expected for such a scenario as Darling announced the government plans to speed up the entry procedures for new banks that would undoubtedly increase competition in the market.

The Budget says new entrants to the market and well-known brands are expected to stimulate competition in products and services.

The Office of Fair Trading is to review barriers to entry in retail banking. Darling says this will consider whether there are obstacles to entrants providing a competitive stimulus, focussing on personal current accounts but considering banking for small to medium enterprises and other issues as may be appropriate.

The government says it welcomes the Financial Services Authority’s intention to deliver further improvements to the bank licensing process, for example improved guidance on initial applications and more structured communication on the status of applications.

The issue of support from banks for small to medium-sized entities was prevalent through much of the Budget.

Darling urged banks to lend more to small businesses and announced that both Lloyds Banking Group and the Royal Bank of Scotland have agreed to legally binding lending commitments for the 12-months from March 2010.

Over this period Lloyds group has agreed to a lending commitment of £47bn - £3bn in additional mortgage lending and £44bn in total gross lending to businesses. RBS has agreed a lending commitment of £58bn - £8bn in additional mortgage lending and £50bn in total gross lending to businesses.

Darling says the government will report to Parliament on the delivery of the commitments at the end of the period. The move was met with approval from the BBA’s Knight.

“When the recession began we saw small businesses reducing their borrowing and paying off their overheads,” she says. “The banks stand ready to lend to small businesses with a sound business plan which might benefit from the package of support announced.”

The lending commitments forced on RBS and Lloyds group were not the only interference in the banking and lending sector ann-ounced in the Budget.

It also states that the government will put secured loans under the FSA’s remit. While it had not given a timeframe on when it will implement FSA regulation this is the first time such a move has been confirmed by the government. The idea was suggested in the recent Mortgage Market Review but not set in stone.

Robert Sinclair, director of the Association of Mortgage Interme-diaries, says the trade body has campaigned for second charge mortgages to be regulated along with first charge mortgages. But he says it is unlikely this will be implemen-ted until at least 2012.

“The FSA will need to fit this around the MMR and what is happening in Europe,” he says.

Following two years of bankers being vilified there was little wonder that Darling mentioned several times the tax on bankers’ bonuses imposed in the Pre-Budget Report.

He claimed this tax has raised £2bn and one hopes it has at least garnered that much, considering the many uses for that cash that Darling spouted, from providing a £2.5bn growth package for small businesses and entrepreneurs, to funding infrastructure, including a new high speed railway from London to the Midlands.

Darling also made it clear that the government supported an international approach to the proposed levy on banks by stating, in a direct attack on the Opposition, that going it alone would be a mistake. And of course, with an election on the horizon, there was plenty of opportunity for Labour to indulge in a few pats on the back in this year’s Budget, including in relation to the Support for Mortgage Interest scheme.

The chancellor announced that the SMI scheme had helped 220,000 home owners and vowed to continue the scheme for another six months. The CML welcomed the move.

“Although wider long-term reform would be desirable, this is a sensible and helpful measure that means those people who do not qualify for help under the extremely tight eligibility criteria are at least likely to see their mortgage interest payment met under the scheme,” it says in a statement.

The BSA also called the decision sensible.

“SMI provides an effective alternative to other government support for struggling home owners,” its statement says. “But we believe that a detailed review of all government schemes to avoid repossession should be undertaken to ensure appropriate safety nets are available to home owners in the future.”

So there we have it. What could be the chancellor’s last Budget before a Conservative administration or, equally, the blueprint for the next four years of a Labour government. Was it good enough to ensure the latter? Will the Stamp Duty holiday be enough substance in a Budget clearly low on other economic policy or has the British public given up already? All will soon be revealed.

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