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Damp squib

There you have it, no more hiding from the obvious. Chancellor Alistair Darling has revealed the true extent of the country’s debt and, to put it bluntly, we’re in it up to our necks.

As he delivered his second Budget Darling confirmed things were worse than we had feared. The UK is £175bn in debt. In other words the working population of Britain each owe £6,000 for this year alone. For the entire population, factoring in those currently in short pants and school dresses – no-one gets off lightly – the debt works out at £3,000 a head.

Darling forecasts that public borrowing will fall to £173bn in 2010. He says the budget deficit will be halved in the next four years, but that to do so any earlier would “choke off recovery”.

So what do we get for our money? Not a lot, is the answer. In fact you’d be forgiven for not noticing the Budget took place since the mortgage market received only the briefest of glances. With confidence in Labour dropping faster than the value of the pound, the sector was hoping, expecting even, this Budget would be of the all guns blazing variety. This was Labour’s final chance to do something productive. It was time to show us what it’s made of. What we got though just stopped short of being pointless.

The Stamp Duty holiday for properties under £175,000 was extended until the end of the year. The Income Support for Mortgage Interest scheme will continue at 6.8% for a further six months and the government will cover mortgage-backed securities, as already indicated. Hardly the big Budget bailout of 2009 but what more could the chancellor have done?

When you’re stuck between a rock and a hard place how much room to move do you have? And even if this is all Darling could do, does it justify that debt we’re going to be shackled with for generations?

Not according to you.

“The Budget projections look like a triumph of hope over experience,” says Andrew Smith, chief economist at KPMG. “Despite having to drastically downgrade his forecast for growth this year, the chancellor still expects the economy to rebound over the next two years.

“Even though he insists that the end of the recession is in sight, we are still looking at eye-watering budget deficits and a doubling of public debt. And if the chancellor’s growth forecasts again prove overoptimistic, the public finances will turn out even worse.”

Smith says the plans for repairing public finances are long on ambition but short on detail.

He adds that cutting public spending has proved difficult in the past and without more detail the plan may be regarded as little more than an aspiration.

“If history is anything to go by, significant additional tax hikes will ultimately be necessary as well,” he says.

Nick Hopkinson, director of London-based Property Portfolio Rescue, says the Budget shows the government is not up for the job.

“The chancellor reaffirmed that he has no quick fix or overnight solutions to the economic crisis,” he says. “The lacklustre measures announced confirm his inability to drive the country out of recession.”

Donald Fox, proprietor of Scotland-based Velocity Mortgages, was also unimpressed.

“We chased and harried Sir Fred Goodwin for what he did to the Royal Bank of Scotland, but we should really be chasing Gordon Brown and Darling,” he says. “We have been left a legacy on public debt that will still be around when I am being buried.

“What is the point in announcing initiatives when lenders don’t want to lend. It is all very well announcing initiatives but it is pointless if the government can’t deliver on them.”

For many, it was a case of déjà vu.

“Billions of pounds have already been pumped into the housing market to little effect so why will this time be any different?” asks Louise Cuming, head of mortgages at

Darling’s Budget followed a pattern. A devastating figure – UK gross domestic product will contract by -3.5% in 2009 – was followed by a seemingly overly optimistic prediction that it will grow by 1.25% in 2010 and 3.5% in 2011. Then came a grandiose declaration of what’s been done so far, dressed up in such a way as to give the illusion these previous moves were part of this Budget.

And finally came the new initiatives, which were mostly damp squibs. We were repeatedly assured that the rest of the world was in the same boat.

With almost every other sentence the chancellor reiterated that “every other country” was hav-ing to do the same as us and the party line was “we can’t cut our way out of a recession”.

Allowing borrowing to rise, he says, is the right thing to do. And what did he do to encourage this? Increase LTVs? No. Scrap Stamp Duty altogether? Er, not quite.

Darling extended the Stamp Duty holiday from last year’s pre-Budget report to the end of the year. Unsurprisingly, the industry was less than impressed.

“We would have liked to have seen the Stamp Duty threshold increased to £250,000, especially in the South-East where the average property price is considerably higher than £175,000,” says Doug Sleaper, group regional director for Surrey-based Badger Holdings.

“This has been a missed opportunity and the government has not been bold enough.”

Peter Bolton King, chief executive of the National Association of Estate Agents, says Darling should have scrapped the tax altogether.

“Merely extending the Stamp Duty holiday is disappointing,” he says. “Darling had a perfect opportunity to get rid of this hated tax, which is seen by many as a tax on aspiration. Since the threshold was introduced last autumn it has helped just a third of first-time buyers.

“In this difficult economic time, Darling could have seized the opportunity to encourage first-time buyers to the market and to send a signal of confidence that may have reverberated around the economy. Instead he has tried to choose a path to please everyone, which I suspect will please no one.” Les Watts, managing director of estate agency Kinleigh Folkard & Hayward, agrees a more drastic change could have been implemented.

“We welcome the extended tax holiday but in reality, it’s more of a long weekend,” he says. “Stamp Duty is an obstacle for many buyers, particularly struggling first-time buyers who find getting a foot on the property ladder in London more difficult than most. But it is important to remember that even in a struggling economy, there are few properties available in London under the £175,000 threshold, so first-time buyers in the capital won’t benefit.”

Of course, it was not through Stamp Duty and reluctance that first-time buyers were steering clear of the market, it was through lack of available credit. And in perhaps one of the only parts of the Budget of some substance Darling announced a plan to guarantee mortgage-backed securities, first mentioned in the pre-Budget report, will now come to fruition.

“The most important element of this Budget for the mortgage market over the long term may prove to be the new asset-backed securities guarantee scheme,” says Michael Coogan, director-general of the Council of Mortgage Lenders. “This potentially offers an opportunity to restart the capital market funding for mortgages that will be a crucial factor in delivering an adequate supply of mortgage credit.”

Bolton King says this move will be welcomed.

“Our figures show that there is a huge demand for property that is being frustrated because responsible people do not have access to appropriate levels of finance,” he says. “Hopefully this measure will go some way to alleviate that and I would just call on the government to monitor carefully that this measure has gone far enough and step in if it doesn’t.”

But some industry figures think even this does not go far enough.

“The scheme to guarantee mortgage-backed securities cannot be seen as a positive as this has been spoken about before,” says Andy Cuthbert, managing director of Surrey-based dot financial services. “What is needed is lenders to be working together as currently they don’t want to lend as it’s too risky. They are still working at the wrong percentages and the only thing that is going to help is getting back to 90% LTV.”

Melanie Bien, director of Savills Private Finance, agrees.

“This should improve liquidity a little but it is a drop in the ocean compared with the amount of money required in this area,” she says. “The securitisation market has been virtually closed, excluding niche lenders that helped boost the volume and breadth of lending pre-credit crunch. Only AAA-rated mortgages qualify, which means anything greater than about 60% LTV or with even the smallest whiff of sub-prime will be excluded. Only prime mortgages will be deemed suitable, which arguably don’t need securitising anyway.”

There was some good news for anyone wishing to get involved in shared equity as Darling announced a further £80m would be invested in the government’s HomeBuy Direct Scheme. According to the chancellor, it has received interest from more than 32,000 people since September last year. Those figures seem less impressive though if Conservative leader David Cameron’s declaration that not a single sale had been made through the scheme is true.

Richard Stone, director of affordable housing broker SPF Sherwins, says investing in the scheme is fruitless.

“The government has missed a trick here,” he says. “This only supports house builders and those who want to buy new-build. Why didn’t it go to MyChoiceHomeBuy where demand is outstripping supply? These are happy days for developers.”

Darling also announced the government will continue its ISMI scheme for another six months for those who have lost their job as long as they are looking for work.

“Last year, I increased and extended the ISMI scheme, which covers mortgage interest payments for those who have lost their jobs,” he says. “Today I can announce that I will maintain the higher level of support for a further six months to help home owners as they look for a new job.”

But the criteria for the initiative is still relatively strict.

“The limit on the support scheme has been extended, but it will still only help households where all mortgage borrowers lose their jobs,” says David McCann, managing director at Newcastle-upon-Tyne-based Guardian Debt Management.

“In our experience it is not only those who have lost their job that are suffering. Many of the self-employed and small businesses are struggling as are low income households. Situations can change quickly and it may only take the smallest change in circumstance to tip the balance and send finances spiralling out of control.”

One move that will be welcomed by the industry was the decision to extend the criteria for the Homeowner Mortgage Support Scheme offered by local authorities. This scheme had previously excluded owners in negative equity, meaning those in desperate need were automatically illegible for help. Last week’s Budget extended criteria so that even home owners who owed more than their property is worth are able to use the scheme.

Since the credit crunch hit, building projects have been stalled leading to a dearth in new homes. Darling pledged to address this by investing £500m into the house-building sector.

As part of the support for house builders, some £100m will be distributed to local authorities to build energy efficient homes.

But many in the sector believe this figure falls short of the mark.

“While we welcome any measures introduced to stimulate the housing market, I have concerns that the £500m package announced will have the desired impact on the new-build and local authority sectors,” says Dean Carter, divisional head of treasury at the Nottingham. “I don’t think the amounts earmarked by the govern-ment are big enough to stimulate a depressed sector.”

Robin King, director of estate agency Movewithus, agrees.

“The £500m support for building projects will help but these measures alone won’t kick start the housing market,” he says.

“Rising repossessions and unemployment uncertainty will play a larger part in dampening the growth, at least for the next 12 months.”

There were changes announced with regard to building society mergers. A measure will be introduced to enable the removal of tax barriers to transfers of business between mutual societies with effect to transfers on or after April 11 2009. For the likes of Nationwide – fast becoming the knight in shining armour for the building societies sector and bailing out Dunfermline, Cheshire and Derbyshire – this is good news.

“As the system stands, there are more punitive tax consequences to two mutual societies merging than there are to two limited companies merging,” says a Nationwide spokesman. “The Budget is seeking to rectify this situation and bring about an equality of tax treatment when it comes to mergers.

“While there is much detail still to be worked out, the general premise is that this rationalisation of the regulations will make it easier and more-cost effective for mutuals which engage in merger activity.”

The Building Societies Association welcomes the move.

“At the moment building societies pay more in tax when they merge compared with banks,” says Rachel Le Broq. “The changes make mergers less expensive and sorts out a long established tax anomaly, which obviously we welcome.”

The mortgage sector is not naive. It knew it could not expect miracles in this Budget and it knew the government had to be realistic. But there was hope that it would offer at least something the sector could get its teeth into, that could provide even the slightest glimmer of hope. As it is, Darling’s offering went off with a whimper rather than a bang. The government did not fight back as one hoped it would and the nation is just left with a debt hangover it will take years to shake.

The rest of the Budget

  • Alcohol taxes to go up 2%

  • Tax on tobacco to go up by 2%

  • Fuel duty to rise by 2p per litre from September

  • Until March 2010 motorists can get £2,000 discount on new cars for trading in cars older than 10 years

  • From April 2010 Income Tax for those earning more than £150,000 to rise to 50%

  • Tax relief on pensions to be reduced for people on more than £150,000 a year from April 2011

  • Statutory redundancy pay will rise from £350 to £380 a week

  • Support for people who have been out of work for 12 months through the flexible new deal

  • Annual limit for tax-free ISAs to rise to more than £10,200 for over-50s this year and for everyone else next year. Of that amount £5,100 can be saved in cash

  • All under-25s out of work for a year to be offered a job or training place from January

  • £1.7bn extra funding for Job Centre network

  • £250m funding to help people get work experience in growth industries

  • Extra funding to create 54,000 new places in sixth form education

  • An extra £9bn in efficiency savings

  • Child tax credit to rise by £20 by 2010

  • Child trust funds for disabled children to rise by £100 a year or £200 a year for severely disabled children

  • Struggling companies can reclaim taxes paid in the last three years until November 2010

  • Businesses’ main capital allowance rate doubled to 40%

  • £750m investment fund to help emerging technologies sector

  • Grandparents of working age who care for their grandchildren can count this as work towards entitlement for the basic state pension

  • Winter fuel allowance remains at £250 for over-60s and £400 for over-80s until 2010

  • Basic state pension will be increased by at least 2.5%,

  • Limit on savings pensioners can have before their pension credits are reduced will rise from £6,000 to £10,000 from November

  • Britain commits to cut carbon emissions by 34% by 2020

  • £1bn to support low-carbon industries

  • £525m for offshore wind projects by 2011

  • £435m support for energy efficiency schemes for homes and public buildings

  • £405m to encourage low-carbon energy manufacturing

    Little of note for housing sector

    Andrew Montlake


    Coreco Group

    It was billed as the make or break Budget, the one which would define Gordon Brown and Alistair Darling’s tenancy of Number 10 and 11, the question is did they deliver? The backdrop to this quintessential speech is an economy where different polls, reports and statistics look like they are saying different things.

    We all know about the bad news, but there have been some signs of improvement recently. What we need now is for government and banks to play their part. Initiatives such as the Homeowner Mortgage Support Scheme are a step in the right direction, although the details may rule out many and only a fraction of the lenders have guaranteed their support for it. But last week’s Budget provided the perfect opportunity for the government to make a bold statement and show that it is serious about helping restore confidence in the property market.

    The headlines will be on the staggering amount of borrowing, some £600bn odd over the next five years and it will be interesting to see how the City responds to those figures.

    But for the housing market there isn’t much to write home about. Yet again the chancellor has missed a trick with regard to Stamp Duty. Merely extending the nil rate band on purchases up to £175,000 is like putting a band aid on a gaping wound, and a more fundamental reworking should have been introduced.

    Saving 1% on £175,000 is not going be a massive incentive, and to put my London mortgage broker hat on for a second, makes little difference here.

    An extra £80m given to HomeBuy Direct, the government’s shared equity mortgage scheme, and the fact that construction firms will get £500m of extra finance to help them borrow to build more homes is nice, but I am not sure it gets to the crux of the issues.

    More encouraging is the fact that new mortgage-backed securities will be underwritten by the government, which should make more of a direct difference. Without being overtly political, like some other commentators, I can’t help feeling more than a little frustrated after this Budget.

    On the one hand, I do not believe it could have done much more to help the situation with the global response and the amount of spending on bailouts. But I still think that, and this was perhaps Cameron’s most poignant point in his entertaining repost, it did not fix the roof while the sun was shining and simply spending our way out of trouble is not the main answer.

    I do not for one minute believe that the Tories would have done much different, or had the political nous to mastermind a global response, but as Sir Alan Sugar might say “you held the reins, so don’t go palming the blame off on anyone else sunshine”.

    No cheer in the gilt market

    Danny Lovey

    Proprietor of the Mortgage Practitioner

    The Budget disclosure of the £175bn in public borrowing for 2009/10 by the government is horrible and even this may be underestimating the eventual outcome. To put it into context, this debt will be 12.4% of gross domestic product for the year, and combined with existing public debt represents 59% of the UK’s GDP.

    Horrendous enough, but combined with the borrowing outlined to 2013/14 this figure is on track to be a massive 79% of GDP. Even that carries the caveat that the chancellor’s view of the recovery, which is rather optimistic, is correct. The problem here, of course, is that the chancellor has been wrong with his forecasts before (£80bn for 2009/10 originally) and particularly his figures at the time of the pre-Budget speech in November 2008.

    After the chancellor’s announcement the government’s debt management office revealed that it will issue £220bn worth of gilts this year, even higher than the £200bn that had been speculated about, and details from the debt management office suggest the final figure may eventually reach £260bn.

    The government is going to syndicate some of the debt and hold the usual auctions. Although it seems this will be done in gilts, it will probably need to syndicate some of it in euro bond-style, probably in various currencies in fixed bonds and floating rate notes to attract the huge amount it will need from overseas investors.

    The path of actual public spending is still on the up but by a reduced rate from 1.2 to 0.7% in real terms in 2011/12. While it’s going down is something, the fact that it’s going up at all rather than seeing a reduction, combined with the massive funding requirement, means the gilt market has nothing to cheer about.

    The Budget will do nothing to quell the fears of higher gilt yields along the curve and will incur more expense from the new issuance of gilts to fund the deficit and the reliance on overseas investors to fund this.

    Sterling dropped around two basis points against the dollar and euro by the time the chancellor had sat down and the gilt market similarly moved lower.

    The impact on the mortgage market as a consequence of higher yields in the market will add to new borrowers’ costs as the swap market moves accordingly.

    While mortgage borrowers who have recently come off fixed rates are enjoying low SVRs, chances are that once the Bank of England starts to move rates up to counter inflationary tendencies in the medium term, these same borrowers will find that the opportunity to secure an attractive fixed rate will have escaped them.

    That is why I have been presenting the government’s funding dilemmas to my clients and recommending that if they want a fixed rate to look at going longer along the curve to five years or so, sooner rather than later.

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