Tick tock tick tock

14 December 2009 | By Christine Toner

Over the last month the housing and mortgage industries had stepped up their calls for the government to extend the Stamp Duty holiday past the December 31 deadline.

It was a last-ditch attempt, a final plea to the jury before the verdict was given. But it seems to have fallen on deaf ears as this year’s Pre-Budget Report did little but confirm what most people already knew - time is running out for Labour.

When chancellor Alistair Darling stood to deliver his speech there was little optimism in the House of Commons and when he laid out his plans there were few surprises.

As widely predicted the Stamp Duty holiday - announced on September 2 2008 - that raised the 1% threshold from £175,000 to £125,000, will not be extended. It will come to an end on January 1 2010 as planned.

Similarly, VAT will revert to its original rate of 17.5% on January 1 from the current 15%.

Darling also announced a freeze in the standard interest rate used to calculate Support for Mortgage Interest at 6.08% for a further six months.

And the government will be prioritising housing for first-time buyers within the Kickstart Housing Delivery programme and increasing the development of HomeBuy Direct homes in 2010/11.

But a clue as to why the chancellor disregarded calls to reduce VAT and Stamp Duty emerged in his discussion of the wider economy.

As predicted, Darling revealed that the economy was forecast to shrink 4.75% in 2009, which is worse than the 3.5% predicted in April. While he predicted that growth of between 1% and 1.5% was expected in 2010 and 3.5% in 2011, it came as cold comfort especially when he forecast net borrowing of £178bn in 2009 - £3bn higher than predicted in April - and estimated borrowing of £176bn in 2010 and £140bn in 2011, falling to £96bn in 2013.

He said he intends the budget deficit to be halved by 2013 and estimated public cost of bank bailouts has been cut from £50bn to £10bn. He told MPs that total spending in 2010/11 would rise by £31bn while current spending is expected to fall by 0.8% between 2011/12 and 2014/15.

There was more bad news for bankers with the news that a one-off 50% tax on bank bonuses of more than £25,000 would be levied. Inheritance Tax was frozen at £325,000 until 2011 with Darling claiming it was not a priority right now.

He announced that all national insurance rates to rise by 0.5% from April 2011 but the increase in corporation tax for small businesses to be deferred.

And that was that. Unsurprisingly, the Pre-Budget Report was met with cynicism from the Conservatives and the Liberal Democrats.

Shadow chancellor George Osborne began his rebuttal by claiming that “we were promised a Pre-Budget Report but we got a pre-election one”.
Osborne accused Darling of achieving the impossible by, “ring-fencing a black hole by staying almost entirely silent on where cuts will be made but promising to keep on spending”.

He also compared Prime Minster Gordon Brown to one of the banks so hated by the public at present.

“Cap in hand, Mr Brown now wants a bailout from the taxpayer,” he mocked.

Finally, he issued a rallying cry to voters telling them they now had a choice - Britain reduced to being the sick man of Europe or the Tory route which would send the message out loud and clear that Britain is open for business.

Liberal Democrat shadow chancellor Vince Cable threw his tuppence into the mix by claiming the increase in taxation will all be spent and not used to pay down the deficit, calling it a complete distortion.

But while the backlash from opposition parties was inevitable, what did the industry think of the key announcements affecting the industry?

The decision not to extend the Stamp Duty holiday was probably the most newsworthy item in the Pre-Budget Report in relation to the mortgage market.

Despite the report stating the government expects 240,000 tran-sactions to benefit from the holiday there were no plans to extend it.

“This is disappointing news not only for first-time buyers looking to take their first step onto the property ladder but also for the wider housing market,” says Nici Audhlam-Gardiner, director of mortgages at Abbey and Alliance & Leicester.

“First-time buyers are the lifeline of the housing market and it’s a shame to see this support come to an end at a time when the housing market is still in recovery. First-time buyers in the process of buying should make sure they complete their deals before December 31 to save themselves up to £1,750 before the tax holiday comes to an end.”

Andrew Hagger, communications manager at Moneynet.co.uk, also believes the decision to end the Stamp Duty holiday was a bad move.

“The chancellor admitted that the recovery is fragile, so why put the dampers on the housing market just when it has started to show some positive signs?” he says.

“Because lenders are being over-cautious, first-time buyers are already faced with having to find deposits of 10% to 20% so having to pay an additional £1,250 in taxation may see demand for property at the vital first rung of the property chain fall.”

And typically brokers weren’t much more complimentary.

“Own goal by Labour,” was how one comment by an anonymous broker on Mortgage Strategy Online started. “Surely a village idiot would have calculated that maintaining the new Stamp Duty threshold would be a vote winner. Maybe Labour has accepted its time in office is done so who cares? More problems for the housing market, thanks very much.”

But David Whittaker, managing director of Mortgages for Business, claims ending the Stamp Duty holiday will not have much of an effect on the market.

“The end of the holiday comes as no surprise,” he says. “Darling has seen house prices rise over the course of 2009 and feels the market no longer needs the support. The fact of the matter is that the Stamp Duty holiday didn’t do a great deal to support the market. Cash-rich investors and those lucky enough to have large deposits have been propping up the market for much of the last six months.

“These buyers are fast becoming thin on the ground though and unless lenders loosen their criteria in 2010 we’re unlikely to see a huge increase in the property market’s fortunes. In fact, we’ll see a reversal.”

But the logic behind Darling’s decision is explained in the full report and unsurprisingly it’s down to the fact that revenue from tax is doing little to fill the government coffers.

With Stamp Duty both on property and shares in 2009/10 expected to be around half of its 2007/08 level the government simply can’t sustain the stimulus any longer.

On the brighter side, the report details the decline in Stamp Duty in 2009/10 is less than assumed in the Budget forecast, reflecting the stabilisation in the housing market. And year-on-year growth in Stamp Duty is likely to turn positive over 2009/10.

The government claims that the freeze on the rate used to calculate Support for Mortgage Interest will benefit around 220,000 home owners.
Once the freeze ends in six months, the government says it intends to move towards a fairer, more affordable approach that will closely reflect mortgage rates.

The government, while lambasted for many of its decisions this year, finally received some praise from the industry for this move. While it was critical of the government’s lack of resolve to extend the Stamp Duty holiday, the Council of Mortgage Lenders welcomed the freeze on Support for Mortgage Interest.

“Lenders are determined that possession is a last resort,” says Michael Coogan, director general of the CML. “With earlier and better communication between lenders, consumers and debt advisers, arrears are being managed through the recession and possession action minimised, wherever possible.

“But a state safety net is also a vital part of the picture. In a low-interest rate environment, and with so much progress being made by lenders and borrowers together, it is no surprise that the backstop government schemes have not been widely used. This situation may change if pressures build, as interest rates rise in the future.

“So we are committed to continuing to work with the government to ensure the best possible outcomes for borrowers going through short-term financial difficulties,” he adds.

Homeless charity Shelter also backed the move.

“The extension of the mortgage interest scheme is particularly welcome as it will mean thousands of low income home owners being able to avoid repossession over the next six months,” says Kay Boycott, director of policy and campaigns at Shelter.

“Measures like the Homeowner Mortgage Support scheme have made a difference in helping struggling home owners keep their homes. But with unemployment continuing to rise, thousands of people are still at risk of repossession and it’s vital a long-term safety net is put in place to support people in need.”

But positive comments like this were obviously in the minority. As various sections of the Pre-Budget Report were met with jeers from the opposition the government was at pains to stress its successes so far.

Darling said that its Mortgage Rescue Scheme and Homeowner Mortgage Support scheme - which provide targeted help for those who have exhausted all other options - will have helped 330,000 home owners since April 2008.

The Pre-Budget Report claimed 135,000 households are benefiting from lender forbearance, including 6,000 in an arrangement equivalent to the Homeowner Mortgage Support scheme.

And the government took the fall in repossession numbers as proof that the measures it put in place have actually worked.

Total repossessions for the first three quarters of 2009 were less than half the CML’s original forecast for this year and the CML has now revised down its forecast and is predicting 27,000 fewer repossessions than were expected a year ago.

The report goes on to say that the government expects that there will be 2,500 sales by the end of this year via the HomeBuy Direct scheme and through moving £100m forward from this year to 2010/11 and prioritising housing for first-time buyers within the Kickstart Housing Delivery programme, it would increase the development of HomeBuy Direct homes in 2010/11.

What the chancellor failed to mention while announcing his party’s success stories was the fact investing in building and property fell in Q1 by over 10%, the largest quarterly fall since 1993.

There was also no mention in Darling’s speech of the one thing widely seen as key to restoring the performance of the UK mortgage market - funding.

And despite it being the curse of the mortgage market through the course of the credit crunch, the Pre-Budget Report only briefly touches upon the issue of liquidity and the securitisation markets.

The first part is a bit of history we’re all aware of. It points out the mortgage-backed securities markets expanded strongly between 2003 and 2007, but at the onset of the crisis these markets saw a sudden drop in liquidity and “a widening of spreads owing to uncertainty about risks”.

It says that a “lack of transparency and the complexity of some products may have contributed to the deterioration in market confidence”.

The securitisation market may yet make a revival according to the government as the report states it is “important that lenders continue to have access to a diverse range of funding sources, including securitisation markets”.

But it’s unfortunately short on a clear strategy of how this should be done. It points out that these markets need to be “robust, more liquid and consistent with financial and macroeconomic stability more broadly”.

The chancellor says the government will explore ways of encouraging more sustainable, transparent and standardised UK mortgage-backed securities markets, working with the Bank of England and the Financial Services Authority through the Council for Financial Stability to establish a broader investor base and lay the foundations for stronger markets in the future.

To support competition, the government says it has secured legally binding lending commitments from the Royal Bank of Scotland and Lloyds Banking Group to lend an additional £25bn and £14bn respectively, subject to demand and on commercial terms, to mortgage customers and businesses.

But as the Association of Mortgage Intermediaries points out, this is not enough.

“The greatest problem we face in the mortgage market is a lack of competition,” says Robert Sinclair, director of AMI. “So we are frustrated that the chancellor has not sought to address this more urgently.

“The commitment to work through the Council for Financial Stability on mortgage-backed securities needs accelerating along with the promise to clarify the rules on covered bonds. We will continue to seek government support for our proposal to draw building societies and non-banking institutions back into lending.”

For taxpayers whose money was used to bail out the banks the news that the government can revise down provision from £50bn to £10bn will be some comfort, as will the announce-ment that the budget deficit to be halved by 2013.

But public spending is expected to increase to £31bn by 2011.

However, there was sympathy in some quarters for the chancellor’s predicament. Alan Cleary, managing director of Exact, says that the chancellor was inevitably caught between a rock and a hard place.

“Darling has had to choose the lesser of many evils,” he says. “The key problem has been the need to cut the deficit to retain our AAA rating. We need this rating to keep the cost of borrowing down. The more the government spends on borrowing the more it has to take out of the economy in spending cuts or tax.

“Darling is already putting up taxes and making relatively severe spending cuts but a ratings downgrade will exacerbate the situation. While the banker bashing and windfall taxes on bonuses Darling has announced are crowd pleasers, the spending cuts will mean huge numbers of public sector redundancies in the medium term. As unemployment increases, so will arrears and possessions. If they do, the housing market will start to stagnate.”

So there you have it - what could be Darling’s last Pre-Budget Report. Since the credit crunch hit, the industry has learned not to get its hopes up when it comes to our beleaguered government taking action.

From the various bailout schemes to the last Budget, whenever the government has stepped in it has provided little more than a tinkering with the problem leaving the industry up in arms.

This time though there seemed less of a furore. Is the industry - and indeed the government - resigned to the fact there is little else Labour can do?

It was a last-ditch effort but was it enough? Is it time for Darling and Brown to take a bow as the bell tolls for Labour? Let the countdown begin.

 

 

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