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Tue 2 September 2008, BBC News

Housing hazards

By Robert Peston
Probably the best things that can be said about the increase in the stamp duty threshold are: 1) that it removes the uncertainty about the costs of buying a property which has been a blight on the housing market (as if another one were needed) since the chancellor's notorious Today programme interview earlier in the summer; 2) that it will help beleaguered housebuilders rebuild their profit margins, since some will simply increase their selling prices by 1%; 3) that the cost to the taxpayer will be minimal, because property transactions in the current fiscal year are running at a fraction of what the Treasury expected (or to put it another way, the public finances will be horrible this year, partly because property-related tax revenues are collapsing). But otherwise, most economists and bankers see the reform as a bit of a yawn-inducer, a non-event. How so? Well a 1% saving for prospective purchasers is neither here nor there when they daily hear prognostications from credible forecasters that house prices may fall a further 15% in the coming year. Here's the big point: the tax change is totally irrelevant to what is driving the generalised fall in house prices, which is that banks are much less willing to lend than they were and are no longer offering super-cheap fixed rate loans. Why was the number of approvals for house purchase down by a staggering 71% year-on-year in July? Did it have anything much to do with stamp duty? No. The incredibly shrinking housing market and squeeze on house prices is the consequence of banks' scything their balance sheets and rebuilding their capital ratios. Or to translate, they are lending less and demanding vastly bigger deposits as a condition of the loans they will provide. In that context, today's package of subsidies from the Communities and Local Government Department for overstretched borrowers and first-time buyers may do a little to lift the gloom at the bottom end of the market. That said, although it may provide priceless succour for those who fear they may be thrown on to the streets, it can't possibly change the negative trend in the trillion-pound housing market. How could it do so, given that the Treasury is providing no new money to the communities department? If the cause of the problem is that the banks are lending too little, any solution would need to encourage them to lend more. And that in turn would probably require an incentive for global investors to deliver the precious moolah to banks which in turn could be transmitted to homebuyers in the form of mortgages. At the moment, those global investors are boycotting our mortgage market, for the blindingly obvious reason that it doesn't look too healthy. Which is why the Treasury is looking at providing some kind of guarantee to investors - which could just be other banks - that they won't lose a bundle if they finance our banks to provide mortgages. It would be the kind of evasive action that can't be done lightly. It could, for example, increase the national debt by tens of billions of pounds. And the governor of the Bank of England has already said he hates the idea, because he fears it could encourage reckless lending of the sort that got us into this mess in the first place. But here's why Mervyn King's objection may be theological rather than practical: lending to our banks is already underwritten by the Treasury, in the sense that in these febrile times it dare not allow bank depositors to fear that they could lose a bean by keeping their funds in the smaller more vulnerable banks. And if the fall in house prices were to gather momentum, the consequence for spending, investment, employment and the health of our banks could be quite troubling. So here's the important calculation for the Treasury: should it temporarily underwrite the mortgage market, to pre-empt the risk that otherwise it will end up as the owner of more banks than just Northern Rock?
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