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Damp squib

The general election campaign whipped up excitement across the country but in the end we were left without a winner, pondering a coalition future

It was an unprecedented week in politics and one that had the country gripped. But after days of confusion and uncertainty the UK has a Conservative-Liberal Democrat coalition government with David Cameron as Prime Minister.

It all began on May 6 as the country flocked to polling stations. The three main parties had done all they could to gather votes but rumblings had already begun that things wouldn’t turn out as clearly as was hoped.

And sure enough, after a fierce battle and months of speculation on May 7 the country awoke to the news few people wanted to hear – we had a hung Parliament.

It was the most fiercely fought general election in decades and in the weeks leading up to polling day it seemed that for the first time in years we had a three-horse race.

The Lib Dems, long considered a wasted vote given the unlikelihood the party would make it to 10 Downing Street, experienced a surge in popularity thanks in no small part to the performance of leader Nick Clegg in the live television debates.

Clegg declared his intention to go all the way by announcing he wanted to be the king rather than the kingmaker. But as stirrings about the possibility of a hung Parliament emerged he told reporters that his party could dictate the policies of the next government regardless of who won.

With opinion polls suggesting the Lib Dems would hold the balance of power, Clegg confidently told his party’s pre-election conference in Birmingham that it could win one in three of the votes cast.

Meanwhile, the Conservatives had practically began celebrating, such was their belief they would be taking control of the country.

Many believed it was the end for Gordon Brown and Labour but the party battled on until in the end, the outcome was anybody’s guess. But despite all the confidence, campaigns and TV exposure none of the parties did as well as they had hoped.

The Conservatives won 306 seats, an increase of 97 on 2005 but not enough to clinch a parliamentary majority. Labour managed 258 seats, a loss of 91 from 2005, while the Lib Dems, despite mounting the most positive campaign in decades, ended up losing five seats compared with the party’s performance in 2005.

So with no party holding an overall majority the country was left with a hung Parliament. The news was essentially an anti-climax. The campaigning had taken on an almost US-style flavour thanks to increased media involvement and the excitement had reached fever pitch.

When it came to an end with no party gaining an outright majority the public couldn’t help but feel it was a damp squib finish to what had been the most exciting election campaign in years.

And once the sense of deflation had passed we were left with mass confusion. Not since 1974 had the UK been subject to a hung Parliament and many voters were left in the dark regarding what was supposed to happen next.

When the end came the public could not help but feel it was a weak finish to the most exciting campaign for many years

A hung Parliament means no single party has a majority – i.e. more than half of the MPs in the House of Commons. As a result, the party that gets the most seats is unable to pass laws without garnering the support of members of other parties.

There are two main ways the governing party can pass laws. First, it can form an alliance or coalition with a smaller party, often meaning some members of the smaller party receive jobs in the Cabinet. Second, it can negotiate with other parties to pass laws on an ad hoc basis.

Essentially, this means that despite his declaration that he would not be a kingmaker and regardless of the fact his party earned the fewest votes of the main participants Clegg found himself in a position of control and eventually decided to back the Conservatives to form a government.

The uncertainty that followed the results was the talk of the mortgage market.

Eric Stoclet, managing director of Crown Mortgage Management, says the inconclusive outcome could have a negative effect of industry confidence.

“A hung Parliament brings with it uncertainty and is negative for financial markets in which confidence is crucial,” Stoclet said after hearing the results. “Instead of focussing on the immense problems at hand politicians have to spend time cobbling together a workable government. “With a coalition government, clarity on how our economic problems will be tackled is not on the cards for some time and the economic recovery is likely to suffer. The big question now is whether a coalition administration can be effective. The next 100 days will be vital.”

But others do not believe a hung Parliament means doomsday for the economy.

“A hung Parliament doesn’t have to mean the end of life as we know it,” says Paul Hunt, managing director of Phoebus Software. “Greece has a strong majority government but it hasn’t been enough to prevent a financial meltdown. The main parties broadly agree on the need for a tightening of the fiscal belt on a scale that should keep the ratings agencies happy.”

Robin King, director at Movewithus, agrees.

“The housing market has experienced a positive though fragile recovery in recent months and a hung Parliament creates challenges, but these are not insurmountable,” he says. “We are looking for decisiveness in the areas of housing affordability, liquidity and movement from buyers and sellers.

“We also need a definitive decision on the future of Home Information Packs and stricter regulation of personal debt to reduce repossessions.”

And Mark Blackwell, managing director of Xit2, points out that 10 of the 16 countries that have triple A ratings are run by coalition governments.

“This proves that coalitions don’t kill off economies,” he says. “Culturally, we have not been a nation built on coalitions in peacetime so the markets may wobble in the short term. But as long as the two governing parties can put their differences aside, focus on what is best for the electorate and maintain financial stability we should not see long-term detriment to the markets.”

Nigel Lewis, property analyst at FindaProperty.com, says he anticipates the market will pick up regardless of the election result.

“Property markets tend to pick up after elections whatever the outcome as buyers and sellers get moving after the hiatus around the final weeks of the campaign, so a hung Parliament won’t change much,” he says.

And Chris Norris, policy manager at the National Landlords Association, says housing issues were largely absent from the election campaign anyway.

“Regardless of whoever is in government we will continue to lobby for a proper recognition of the contribution landlords make to the housing mix,” he says.

But following the news of the hung Parliament there were more political twists and turns. As the clear possibility of a coalition began to dawn Clegg made it known that he would not be willing to work with then Prime Minister Brown. It was no surprise then that as the results came in Clegg told the media he believed Cameron should have the right to attempt to form a government first.

The Tory Party pointed out that a government consisting of Labour and the Lib Dems would be a coalition of electoral losers

Cameron duly complied, holding talks with the Lib Dems. One of the major bugbears was reported to be electoral reform, which the Lib Dems seek. They have made no secret of the fact they believe the first-past-the-post system needs a fundamental overhaul.

Under the current system voters in 650 constituencies elect the single most popular candidate in their area. But this system has been slammed by the Lib Dems because the Conservatives and Labour have power bases in certain geographical areas. This means that even if a party has huge national support, if there is not enough concentrated local support any votes for its candidate are effectively wasted.

The proportional representation system known as Alternative Vote Plus, which the Lib Dems have long lobbied for, would mean voters being given two votes. The first would be used to elect around 500 MPs from single member constituencies. The remaining MPs would be selected by voters listing candidates in order of preference. This would decide how many seats should be given to the parties by county rather than by constituency.

While clearly keen to strike some kind of deal with the Lib Dems Cameron made it clear he would not give in easily to demands for an overhaul. The Tories also made it clear that there were other areas they would not be moved on – namely Europe and immigration.

Cameron vowed not to concede any more power to the European Union and insisted that “no government should be weak or soft on the issue”.

Of course, declarations such as this were designed to ease the concerns of senior Tory members who opposed the proposed deal between the parties.

Even with these conditions things looked positive for the Conservatives. While the political policies of Labour are closely aligned with those of the Lib Dems and a union between the two would not have taken as much of a compromise as that between left wing Lib Dems and right wing Conservatives, the big obstacle was still Brown.

So it seemed the Tories had it in the bag. That is, until Brown made a shock announcement on May 10 that he was to step down as Labour leader.

“If it becomes clear that the national interest, which is stable and principled government, can be best served by forming a coalition between Labour and the Liberal Democrats I believe I should discharge that duty to form that government which would, in my view, command a majority in the House of Commons in the Queen’s speech and any other confidence votes,” he told reporters. “But I have no desire to stay in my position longer than is needed to ensure the path to economic growth is assured and the process of political reform we have agreed moves forward quickly.

“The reason we have a hung Parliament is that no single party and no single leader was able to win the full support of the country. As leader of the Labour Party I must accept that is a judgment on me. I therefore intend to ask the party to set in train the process needed for a leadership election.”

This prompted the Tories to up the ante. Despite earlier only agreeing to set up a committee on electoral reform the Conservatives announced, via shadow foreign secretary William Hague, that they would give the Lib Dems the referendum on electoral reform they craved.

This was clearly the Tories playing their ace and the consensus was that this was as far as the party would go.

The most significant tool at the Tories’ disposal at this point was arithmetic, with supporters quick to point out that a coalition between Labour and the Lib Dems would be, in effect, a coalition of losers.

On the morning of May 11 the industry was on tenterhooks. Talks between Labour and the Lib Dems continued and at one point it looked as though a deal was set to be done. Then at 4.30pm it was announced that talks had failed.

The Tory Party pointed out that a government consisting of Labour and the Lib Dems would be a coalition of electoral losers

And with that there was nothing left for Brown to do but leave. Cameron was summoned to Buckingham Palace and at 8.40pm entered Downing Street as the country’s new Prime Minister.

With Clegg his deputy, George Osborne his chancellor and Vince Cable his business secretary, how this coalition will work remains to be seen.

But Cameron has wasted no time announcing there will be accelerated action to cut the budget deficit, with £6bn of spending cuts this year – something Labour had been opposed to.

He has also said there will be an emergency Budget within 50 days, the planned 1% National Insurance increase will be scrapped and there will be a phased reform of the tax system.

And there you have it. The UK has a new government and it’s one few could have imagined. Now the market is hoping those in power will finally turn the spotlight on the housing market and address concerns that all parties somehow managed to overlook in their manifestos.

Hoping for mutual support

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Paul Broadhead
Head of mortgage policy
Building Societies Association

Elections in this country usually provide certainty and strong leadership, whether returning a government to office with a new direction or electing a fresh administration with an unambiguous mandate.

But while writing this article the political landscape changed constantly. The scene switched from Conservative-Liberal Democrat to Labour-Lib Dem to former Prime Minister Gordon Brown resigning and Tory leader David Cameron being sworn in as PM. The picture of uncertainty did not bode well for the economy but the agreement between the Tories and Lib Dems gives us a chance to build confidence in the coming months. It will be fascinating to see how policy emerges.

A critical component of economic recovery is a properly functioning housing market underpinned by sufficient mortgage finance. As demonstrated by the Building Societies Association’s Property Tracker time and again, an improving housing market needs consumer confidence. But even if confidence returns quickly the challenging funding environment faced by lenders could dampen any rebound in consumer demand.

Building homes in meaningful number seems off the agenda as no funds are available

What the coalition government means for wider housing policy is uncertain. Many had hoped that a new government together with a summer feel-good factor would help the market and encourage undecided consumers to commit to sell or buy property. But many may wish to wait and see how things turn out politically before committing themselves.

The Queen’s speech on May 25 is unlikely to major on housing policy. Building new homes in any meaningful number seems off the agenda, with no funds to deliver the houses required. The supply and demand dilemma is exacerbated by private developers’ reluctance to build in the present fragile environment.

As well as housing market uncertainty a coalition government brings doubt to other areas where building societies and mutual deposit-takers operate. It’s essential that the government does not try to plug its deficit through fierce competition from National Savings & Investments in the savings market. This would further damage the supply of funding to the mortgage market. We are urging the coalition to retain NS&I’s zero funding commitment for 2010/11.

What has been encouraging from all parties is their support for the mutual sector. The Lib Dems have been explicit in what they want – Northern Rock as a society, a minister for mutuals and updated legislation. We wait to see if the Tories fully embrace these ideas.

The coming weeks will tell us more about the direction this government will take on key issues, and we may have a further wait until we see what that means for lenders, the housing market and the wider economy.”

Lib Dem plan to split banks’ retail and capital activities is a worry

Robert Sinclair
Director
Association of Mortgage Intermediaries

The emergence of a coalition government has some serious implications for the mortgage market. With George Osborne as chancellor and Vince Cable as business secretary it is likely that we are in for a significant amount of change.

The early commitment to a long-term parliament is a signal that this administration intends to get tough on the budget deficit. It is a long-held Liberal Democrat view that banks need to have their wholesale capital market and retail activities divided. As we currently have such a limited range of organisations offering mortgages any changes could make the market more fragile. All our core lenders of scale are global banks that will come under scrutiny.

But how the new administration will view the Special Liquidity Scheme and the current commitments to lend is open to question, as its natural inclination will be to avoid market intervention. But these are important vehicles that have underpinned the market and until the securitisation market is functioning they need to be maintained.

New ministers will be briefed by a Treasury that is perplexed. It has seen gross mortgage lending settling at around £140bn and yet house price inflation is still close to double digits. Many at the Treasury consider this a risk and one of the few levers it has left is to change taxation on prime residential property. The introduction of VAT on new properties or Capital Gains Tax on house sales would help fill Treasury coffers but could further damage a fragile market that is seeing historically low transaction levels.

One of the few levers the Treasury has is to change taxation on prime residential property

Such changes could severely reduce social and economic mobility, put more pressure on first-time buyers and further stretch rental markets that are showing price pressures.

The prudential regulation of banks is now less likely to move to the Bank of England but the prospect of the morphing of the Financial Services Authority into a new Consumer Protection Agency remains. Into this will be funnelled the credit aspects of the Office of Fair Trading as well as the Business, Enterprise and Regulatory Reform policy teams. In a world viewed through Cable’s eyes we could see early, tight scrutiny of affordability and the end of easy credit.

Of course, the need for individuals to have access to advice about their borrowings sits at the core of all this. We have always argued that those who sell credit should take responsibility for the advice they give. This means the prevalence of non-advised mortgages at some lending organisations must be reduced.

There is much to be done to restore confidence and deliver a more stable mortgage and housing market. We remain concerned about the impact on customers who are on base rate trackers and lenders’ default rates. These borrowers’ ability to secure longer term funding within their budget remains limited and we must resolve this. We need to provide a safety net and not leave them at the mercy of those whose only motive is profit. AMI stands ready to work with all parties in the new administration to ensure a better and fairer market for all.

Big increase in Capital Gains Tax would reduce the attraction of B2L

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Ray Boulger
Senior technical manager
John Charcol

Once the voters had delivered their verdict at the general election there were only two viable options – a coalition or a minority Conservative government. The latter would inevitably have been unstable and could have been brought down at any time. It would also probably not have been as robust as is necessary to deal with the enormous budget deficit bequeathed to the new administration by former Prime Minister Gordon Brown.

Given the tricky cards Tory leader David Cameron was dealt by the electorate he has come up with the best possible solution in a Tory-Liberal Democrat coalition.

The gilt and equity markets have responded positively to the coalition announcement but because these markets have also been hugely impacted by the eurozone crisis, the interplay between reaction to the election result, the new governing arrangement and the developing European situation is not obvious.

Many Conservative voters will be happy the government has taken on board the Lib Dems’ plan to substantially raise the threshold at which Income Tax becomes payable and that the Lib Dems’ mansion tax has been dropped.

But negatives include the decision to still impose higher employee – but not employer – National Insurance contributions from April 2011 and to adopt the Lib Dems’ proposals to massively increase Capital Gains Tax.

Some sales are likely to take place to beat the possible tax rise in the emergency Budget

A majority Conservative government might have decided it needed to increase CGT anyway but we shall never know. If the tax is increased to a top rate of, say, 50% and the annual personal exemption – currently £10,100 – is drastically reduced this will have a significant impact on the buy-to-let market unless there is some mitigating action. Such action could include leaving the rate at 18% for longer term gains, bringing in a gradual reduction in the rate over time as with Inheritance Tax, or applying a much lower 10% entrepreneur’s rate.

It is not clear when the higher rates will take effect. We have never had a change in the rate of CGT during the tax year so the most likely scenario is that the changes will come into effect on April 6 next year.

But then again, we don’t usually have a Budget in June either. Some investors with large capital gains may be tempted to sell properties before the promised emergency Budget, but with less than 50 days to play with the timescale will be challenging.

Furthermore, without knowing exactly what the changes in CGT will be it is impossible to know whether selling in advance of the Budget will reduce the tax payable.

Looking ahead, a big increase in CGT will seriously reduce the attraction of buy-to-let. In the short term some early sales are likely to take place to beat the tax rise. Longer term there will be a sharp reduction in the number of buy-to-let properties purchased. Consequently, rents will rise and tenants will have less choice. Not a clever housing policy.

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ADAM TYLER, CHIEF EXECUTIVE, NACFB

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