by Piper Terrett, 22/04/2009 00:00

'Missed opportunity' for housing market

Opposition leader David Cameron condemned this year's Budget as a "missed opportunity" and many housing industry insiders would agree.

Considering its importance as a measure of consumer confidence, there was apparently little in this year's Budget speech to bolster the UK's property market.

However, dig a little deeper and there are a few things that Darling hinted at that could boost the market in the longer term, although commentators would like to see the government do more.

As leaked to the media, the chancellor is extending the stamp duty holiday on properties sold for less than £175,000 until the end of 2009. He claimed 60% of UK homes will continue to be stamp duty exempt.

However, estate agent Kinleigh Folkard and Hayward says this will have little effect on first-time buyers in the London area. "Stamp duty is an obstacle for many buyers, particularly struggling first timers," explains managing director Lee Watts. "However, even in a struggling economy, there are very few properties available within London under the £175,000 threshold, so first-time buyers in the capital won't really benefit. Less than 5% of the properties we're currently selling would benefit."

From the ground up
The chancellor also unveiled incentives for the construction industry. Darling will make £500 million available for housing projects postponed because of the credit crunch and a further £100 million for local authorities to build energy efficient housing.

Commentators welcomed the move. "It's important during the credit crunch to ensure builders continue to build," explains Alex Solomon, head of product at Rightmove.co.uk. "You need to have the infrastructure to build homes. If you allow the infrastructure and the skills to move out, it will take longer for the house builders to react when the recovery comes."

There are tentative signs that the bottom has been reached in the housing market. According to Rightmove.co.uk's house price index, buyer inquiries continued to rise in April and sellers raised their prices.

More lending needed
However, the lack of available mortgage finance remains a major stumbling block. Despite low interest rates, many buyers are unable to borrow at competitive rates unless they have a 25% deposit. While the Council of Mortgage Lenders' figures out this week show mortgage lending increased by 16% in March compared to February 2009, gross mortgage lending fell by 52% to £11.5 billion year-on-year.

On the face of it, there was little in the Budget to remedy this. But one measure the chancellor briefly mentioned could have a significant impact: the government's Mortgage Guarantee Scheme. Under the scheme, mortgage lenders would be able to lend more than 75% of the value of a home with the government guaranteeing the figure over 75% if the borrower got into difficulties.

"The government needs to get clearance for it from the EU," explains Solomon. "But assuming that it would be available to all lenders, I'd hope it [would free up lending]. However, it's not just about increasing the funds available, it's about mortgage products [which have been withdrawn] coming back to the market."

Despite these measures, industry insiders believe the government should have been more proactive. "The chancellor could have chosen to rework the levels of stamp duty entirely," says Watts.

Awaiting stamp duty reform
Industry insiders say the chancellor should consider fundamental reform to the stamp duty system. Currently, the stamp duty thresholds distort the market, preventing sellers pricing properties at £176,000, for example, because of the stamp duty suspension on homes selling for up to £175,000.

Reformers say the government should introduce a system similar to the income tax system, with buyers paying stamp duty only on the amount above the stamp duty threshold. For example, on a property priced at £180,000, the buyer would only pay 1% stamp duty on the £5,000 above the £175,000 threshold.

Alternatively, others argue that stamp duty thresholds should be indexed to a measure of asset appreciation, such as the Retail Price Index. Commentators are also concerned about what will happen to the market when the current stamp duty holiday ends. In the 1980s when a similar suspension was withdrawn, sales dropped significantly.

The chancellor has also extended the eligibility entitlement of income support for mortgage interest payments by six months, improving the lot of home owners who lose their jobs. But Solomon says the devil is in the detail.

"Currently it's paid at a standard rate," he says. "But if you have a sub-prime mortgage, you'll be paying a much higher interest rate. Plus it's based on total household income and it should be based on an individual's income."

With rising unemployment and available mortgage finance scarce, the housing market will take some time yet to recover. "We've put our foot on the first rung of recovery, but we've got a long, long way to go," admits Solomon.

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