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The Germans worry like it’s 1929

Kevin Paterson takes a weekly peek at the latest developments in the market and brings you what’s hot and what’s not in the world of mortgages

The British are often accused of being anti-European, more so thanks to the credit crunch gripping our economy. The crisis is so severe we’d be forgiven for thinking that the problems are worse here than elsewhere, except perhaps in the US where the whole thing started. But Germany’s economy has been so badly hit by sub-prime losses that its banking system is threatened.

This is surprising because Germany has not been involved in the property boom that has swept across Europe in the past decade. It has low levels of property ownership, typically around 40% compared with over 70% in the UK, and a culture of state subsidies for rental accommodation.

German banks have also been reluctant to lend money to residential borrowers so it’s ironic that in search of profits outside the domestic market many of them plunged into the murky waters of collateralised debt obligations.

Since there are more than 2,200 German banks the scale of the losses could be far greater than in any other European country. This could lead to major consolidation in the sector. One small bank, Bremerhaven-based Weserbank, has shut its doors and many others have disclosed huge losses and are seeking help from the state to continue trading.

Like in the UK, German taxpayers are expected to bail out the banks. The one small benefit for them is that due to low levels of home ownership, higher interest rates and tighter credit criteria are unlikely to affect the housing market too badly. But higher taxes to recoup the billions spent propping up the banks is a possibility.

For long-suffering German taxpayers this must seem like a replay of the 1929 Depression, which helped propel the Nazis to power and led the country to ruin.

They must be hoping that the reassuring rhetoric of the Deutsche Bundesbank and politicians of all stripes has some substance as they continue to downplay mounting losses. Like in the UK, there will be more casualties before the credit crunch is over.

Raising Stamp Duty threshold could bring FTBs back to the market
One of the main reasons for the slowdown in the property market is the lack of first time-buyers. Many believe would-be property owners hold the key to maintaining the market and more should be done to encourage them.

But the recent Budget did nothing to help first-timers, a classic example of a missed opportunity. Chancellor Alistair Darling’s inability to tackle the issue proves once again that the government is out of touch with what’s happening on the ground.

The chancellor lifted the Stamp Duty threshold for first-timers but only on shared ownership schemes, a relatively small market niche. Darling ignored calls to raise the wider threshold from £125,000, a figure fixed two years ago.

This is staggering when you consider the Royal Institution of Chartered Surveyors says a £150,000 threshold would put almost 17% of housing transactions out of the reach of Stamp Duty. This would add significant value to the embattled property market without overstimulating it.

Let’s not forget the government raised more than £6.4bn in revenue from Stamp Duty last year. If you add in the increasing prevalence of hefty arrangement fees and a shortage of realistic options for first-timers, it’s no wonder the market is stalling.

We are all aware of the problems facing the mortgage market and there’s more the government could do to mitigate their impact.

Simply lifting the Stamp Duty threshold for first time buyers and encouraging lenders to be more sympathetic to their plight by offering realistic LTVs could bring some much needed growth and stability to the market. It’s time for Darling to act.


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