There’s also a scheme where buyers can borrow up to 30% of the value of new-build homes, co-funded by the government and developers. Communities and local government minister Hazel Blears claims the total package is worth £1bn. But will it work?
There are assumptions underlying these proposals that need to be questioned. Despite assertions to the contrary by Prime Minister Gordon Brown, the economy is still cyclical.
Whether one considers long-term growth trends, affordability or house price-to-earnings ratios, the fact is we’ve experienced a major housing bubble. House prices were inflated and vulnerable to correction. I also think it unlikely that they will fall exactly to fit long-term trends and then resume moderate growth. They are as likely to overshoot on the way down as they did on the way up.
The government’s measures to stimulate the market are worrying as they are unlikely to work and are morally misguided too. As the British Property Federation notes, ownership at all costs might make the situation worse. They won’t work because Stamp Duty is not the reason housing transactions have collapsed. Let’s assume a £150,000 house is up for sale. Buyers will now save the 1% Stamp Duty payable prior to the threshold shift, or £1,500 in this case.
But buyers used to source 90% ltv or even 100% ltv mortgages. Now they can get 85% LTV deals if they’re lucky. So they must find an additional £7,500 to £22,500 to boost their deposits. Tinkering with the Stamp Duty threshold is like spitting into a hurricane – pointless, foolish and messy. It does not address the primary reason consumers have stopped buying. Encouraging them to buy homes when they will almost certainly drop further in value is negligent. If a broker or lender did this the Financial Services Authority would intervene. The new shared equity scheme must bear this in mind. Most consumers want to own property and making it easier for them to do so could be a good thing. But it could also encourage them to take on commitments they cannot afford and burden them with a lifetime of debt.
By contrast, enabling social landlords to buy property is a fantastic idea. Social housing stock has dwindled and there is massive demand. If housing associations can soak up excess stock such as new-build flats at bargain prices, this would be good for the economy and society, although developers and private landlords may disagree.