Property: Trapped in a spiral of debt: Owning your own home is a major financial risk. Caroline McGhie considers the rescue packages building societies have in store

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The Independent Culture
IF Walter Greenwood were writing Love on The Dole today rather than in the recession of the Thirties, he would have to set it in the south not the north. The principal characters would have to be white-collar workers - architects or graphic designers - rather than factory workers. And the threat hanging over them would be the loss of their homes rather than the collapse of male pride and the breakdown of the family.

It is an all too familiar story, and one that has probably affected people's spending plans much more than most of them have owned up to. It scotches any renewal of the 'feel- good' factor that the estate agents and DIY giants have been praying for - the optimism that makes people want to move onwards or upwards, round the corner or out to the country. For the first time in the history of property ownership in this country, buying a house represents a definite financial risk.

It is also the first time building societies have joined forces to press the Government for direct remedial action. House sales now have such a pivotal role to play in the economy that the two are seen as chicken and egg in any possible recovery. The vicious circle of depression begins with the belief that housing is synonymous with wealth, and people won't start to spend again until the housing market picks up. But house sales won't pick up until the economy improves, and the economy won't improve until consumers start spending. So round we go again.

But how deep is the trough? The price-falls of 20 to 30 per cent are unprecedented in the south, and sales have never been so sluggish. The annual national sales total peaked at 2.1 million in 1988, fell to 1.4 million in 1990, then to 1.3 million in 1991, and is likely to slump to 1.1 million this year. In each of the last three years, analysts said recovery was just round the corner.

Sales have fallen back to the levels of the early Seventies, two booms ago. But since only around half of the population then owned their own homes, and closer to three-quarters do now, the level of sales in real terms is actually the lowest since records began in the Fifties.

Gary Marsh, who heads the research department at the Halifax Building Society, charts the progress of the recession with the care and attention of a doctor whose patient is in intensive care. The level of transactions is the heart-beat of the market; the other two vital functions are mortgage lending - down from pounds 42bn in 1988 to pounds 25bn this year - and house prices.

The house-price story is a tale of north and south. 'In the north,' says Marsh, 'we have not really seen prices fall at all. Rises continued through into the middle of 1991. Since then they have dropped 3 per cent from their peak in Yorkshire, and 2 per cent in the north-west. In Scotland they haven't fallen at all.'

Again, comparison with the Seventies slump shows that this one is far worse. Then, prices remained static all over the country. This time the south is suffering alone. Jim Murgatroyd, head of corporate affairs for the Halifax, has a theory. 'The big difference is that the whole economy is much lower now. The Seventies recession was largely due to a slump in manufacturing. This time it is financial. The white-collar workers have been the ones most exposed to unemployment this time, and they are just the ones who are the most highly geared financially.'

Murgatroyd believes that northern stoicism and common sense helped to keep the local market steady. 'The north is used to unemployment and has lost many of its old industries. People in the south have been protected until now. They are facing the realities that people in the north have learnt to live with for a long time.' The average size of a mortgage in the south-east ( pounds 60,000) is around a third higher than in the north ( pounds 30,000-40,000).

The fight to conquer inflation has put an end to another old southern comfort. We all knew when we bought a house that the mortgage repayments might hurt for the first couple of years, but after that inflation would ease the pain. The Government is now driving the last ounce of inflation out of the system but it failed to warn us how painful it would be. The French had to cope with a similar adjustment but they don't borrow as much as we do. Total borrowing in France is pounds 140bn, compared with pounds 300bn in Britain. The French also have a healthy rented sector as an alternative to home ownership, whereas we in Britain don't. Property analysts are at their wits' end trying to work out how to kick- start the market again. The Abbey National has proposed offsetting equity losses of up to pounds 10,000 against tax to help some of the estimated 1.5 million people whose homes are now worth less than their mortgages. NatWest called for the Government to double mortgage interest tax relief to pounds 60,000 (so targeting the first-time buyer), phasing it out over 10 years. The Woolwich has suggested a similar scheme, combined with raising the stamp duty threshold to pounds 60,000. The Nationwide Anglia is tinkering with another kind of negative equity scheme yet to be announced, aimed exclusively at helping borrowers with impeccable repayment records.

The Halifax is currently working on a paper due to be published in September, a month before the Conservative Party conference. 'We believe the market must have some help,' says Gary Marsh. Repossessions are likely to continue at the present rate of around 35,000 every six months, and the 305,000 borrowers who are over six months in arrears aren't going to go away.

'The best way is to cut interest rates. Then industry could recover as well. If the ERM prevents the Government doing this, we are left with a collection of second-best measures. But we don't want to recommend anything that distorts the market or that upsets any of our borrowers, and the Treasury is insisting that any measures must be self-financing.'

The property rescue package that seems to be gathering the most support behind the scenes is one that involves mortgage tax relief. Here is a substantial subsidy, worth pounds 5.5bn to the private housing sector, already in place as a card to play with. There has already been much talk of gradually phasing it out; it could, however, be made to do some good even as it vanishes. Several building societies have discussed the idea of playing with mortage tax relief - but only off the record, so worried are they about the public reaction to it.

It might, for instance, be possible to reduce tax relief on mortgages up to pounds 30,000 from 25 to 20 per cent without causing existing borrowers too much distress. Those on standard rate taxation and relief on pounds 30,000 would lose pounds 150 a year, or pounds 12 a month. This would yield a pot of pounds 1.1bn which could then be used to provide more mortage tax relief for first-time buyers, the very people who can make the wheels of the market start to turn again. They could be allowed tax relief on mortgages up to perhaps pounds 50,000 for a limited period of five years only.

Over the five years, existing borrowers could have their remaining tax relief gradually phased out at the rate of one-fifth annually, so putting more money aside for first-time buyers and providing leftovers for mortgage benefit - to help those who can't meet their repayments but are in employment and therefore don't qualify for other benefits. The downside is that existing borrowers would lose a perk they have enjoyed for many years. The benefit would be a healthier housing market.

The time may be right to introduce such a scheme. House-price falls are lower than they were two and three years ago. In East Anglia prices have even risen slightly in recent months. Increases in the unemployment figures are slowing. And one positive result of the recession is that houses are much more affordable than they have been for years. But will existing borrowers squeal at the prospect of losing their mortgage tax relief in such a way?-

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