If a tax cut won't do the trick, can anything save housing?

Last week's big Government announcement on housing fell flat. A rise in the stamp duty threshold from £125,000 to £175,000, to help first-time buyers on to the ladder, was seen by critics as doing little to solve the problems of a market in freefall, bereft of mortgage finance. But with the Halifax reporting that house prices are falling at 10.7 per cent a year, is there anything that can be done to stop or slow the slide, and should be we even be trying?

We're now a year into the credit crunch and just getting a mortgage is proving difficult for many. Interest rates have begun to drop on some deals but lending criteria are still very strict, with some lenders demanding deposits of 25 per cent before the door is unlocked to the best mortgage offers. All in all, experts doubt that a significant shift from lenders is on the cards to help boost the market.

The chief problem is that banks are still unwilling to lend to each other. This in turn means that funds to advance to buyers are not forthcoming either. "Only a handful of the big lenders really have an appetite to lend," says Melanie Bien, director of independent mortgage broker Savills Private Finance. "They are reducing fixed and tracker rates, but those who need to borrow high loan-to-values – first-time buyers – are finding it incredibly difficult to access funding."

Matthew Bullock, chief executive of Norwich & Peterborough building society, says that unless the money markets can be coaxed into life, so increasing the supply of mortgages, house prices will continue to fall. "Banks and building societies are all scrambling around for funding from savers' deposits. But that market is worth a maximum £50bn to £60bn a year. Before the crunch, banks were raising £100bn on the markets. There is a massive shortfall and we need to unclog the money markets and find an extra, say, £40bn to get the market moving again."

The Council of Mortgage Lenders has suggested that the Bank of England should step in and play the role of backstop for lenders. This would involve the Bank allowing lenders to borrow from it using "covered bond investments".

"These bonds are safer than the mortgage securities that started the whole credit crunch as they are backed by the issuing institution. If the Bank were to provide the option of using these bonds, it would add an extra layer of confidence," says Mr Bullock.

Even if the money markets are unclogged, there is a risk that a recession will drain any life out of the housing market.

"With unemployment starting to rise, consumer confidence is very low," says Louise Cuming at comparison site Moneysupermarket.com. "The last thing people are going to do in a climate like this is go out and borrow more money. So lenders will have to gain a little more common sense to get the market going, by looking at mortgage affordability and other criteria."

But Martin Ellis, chief economist at the Halifax, suggests the market turmoil has to play itself out: "Prices are returning to a more sustainable level, and the only thing that will help first-timers is lower prices. It is simply a case of time reaching that affordable point."

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