This weekend – the traditional Easter start of the housebuying season – will test whether Alistair Darling's new stamp-duty holiday can stop the property market from being the first part of the economy to show a double dip.
After the market soared out of depression last year, the volume of deals plunged in January causing prices to fall for the first time since last April, according to mortgage lenders. The 0.7 per cent increase for March recorded by Nationwide building society was not enough to offset February's fall, and while the Budget cut in the tax paid by first-time buyers will make purchase easier, it gives no incentive to act now rather than wait.
Buyers, lenders, politicians and existing owners are closely watching the Easter market for any signs of movement, but there are warnings that the long general election campaign, economic uncertainty and even the football World Cup could mean the slump in housing transactions continues.
"The summer effect could start early," says a Buckinghamshire property agent, Michael Day. "The election is not so far away and there is a lot of thought we could end up with a hung parliament. I can see us merging from a general election into a World Cup – when the housing market always closes down – followed by holidays, and then it'll be autumn."
Nor is there a need to act quickly to benefit from the new stamp-duty holiday as there was last year as the cut-off for the previous temporary tax concession drew closer. Mr Darling has said the new exemption will last for two years.
There was certainly a rush to beat December's deadline when stamp duty at 1 per cent became payable again on purchases between £125,000 and £175,000. That accounts for some of the collapse in deals since January, but Nationwide's chief economist Martin Gahbauer is not convinced of how responsible it was to increase prices by 10 per cent during the final nine months of the year.
Interest rates were at record lows over that same period, he points out, and he says that before the December rush "there was no appreciable increase in transactions at the lower end of the chain".
The Chancellor's new attempt to boost the market will exempt properties up to £250,000 and will mean that 90 per cent of first-time buyers will pay no tax, saving them up to £2,500 when they are most financially stretched.
First-timers are key to a buoyant property market. They introduce new money into a system that allows previous buyers to move up the housing ladder as people trade up or take profits to finance their retirement or healthcare needs. It may look like a giant Ponzi scheme but it works only if new buyers take their first step.
House prices reacted as soon as the financial crisis struck in September 2007, instantly ending their long upward climb. It was many months before the rest of the economy went into recession. By this time last year, property had fallen 20 per cent.
However, in the price range affected by last year's stamp-duty holiday, the number of transactions plunged by 80 per cent between December and January according to the Council for Mortgages Lenders, and the prices paid fell 3 per cent.
Even including properties priced above £175,000, for which the tax was unchanged, the number of loans granted for house purchase fell by 49 per cent between December and January. Bad weather was blamed at the time but last week's figures from Nationwide show no improvement.
"The number of loans taken out for home purchase failed to recover from January's large dip, suggesting that weakness in house sales at the start of the year may have been down to more than snowy weather," says Mr Gahbauer.
One other factor is credited with last year's boom, however: a relatively small number of buyers – far fewer than in pre-crash markets – was chasing an even smaller number of homes for sale. Only as it became clear that prices were rising did owners start putting their properties on the market, but it takes time to organise estate agents and arrange HIPs, the legally required home information packs.
Martin Ellis, a housing economist at Halifax, the biggest property lender, says: "An increase in the number of properties available for sale has helped to reduce the imbalance between supply and demand."
But while more homes usually come on the market at Easter, when the longer days show properties at their best, Mr Gahbauer thinks the imbalance has been rectified by the reduction in buyers.
Although the new stamp-duty break applies only to first-time buyers, in practice they were the main beneficiaries of the last scheme. Would-be first-timers complain that high prices prevented them from buying and that large loans are hard to obtain since the credit crunch. The average age of buyers purchasing their first property has risen from 33 to 36 over the past four years.
Those first-timers who bought in the 12 weeks between the last tax holiday ending and this one beginning may feel aggrieved, but the typical first-time buyer will now save £1,368, says Mr Gahbauer, and also benefit from interest rates that are expected to remain low.
This has led to the proportion of buyers choosing variable-rate mortgages, rising from 14 to 39 per cent in recent months because the immediate payments are now lower than fixed-rate loans. Mortgages are also easier to obtain now too, with the average first-timer borrowing three-quarters of the buying price.
There are other economic indications that allow optimism too. Unemployment has fallen this year to the surprise of many, and the Nationwide's consumer confidence index is at its highest level since January 2008, twice as high as a year ago. The index shows more people expecting the economic situation to improve and fewer predicting jobs cuts. "Consumer confidence is crucial to a strong and sustainable recovery," says Mr Gahbauer.
But pessimists see a series of clouds on the horizon that give prospective purchasers the excuse to delay, not least forecasts that repossessions will rise this year. The Council of Mortgage Lenders started last year expecting to take control of 75,000 homes: the rising market limited the number to only 46,000 but the prediction for this year is an increase to 53,000.
Other fears are political, with worries of the prolonged uncertainty of a general election campaign being followed by steeper job cuts and tax rises than those already announced, resulting in the market freezing for many months.
With the Conservatives promising to scrap the disliked HIPs within weeks of winning an election, sellers have reason to wait before putting homes on the market, warns Mr Day.
And the Council of Mortgage Lenders is worried that the Bank of England's £312bn support to banks and building societies will come to an end in April next year with no obvious alternative source of funding. The director general, Michael Coogan, warns: "There is an immediate risk that some businesses may hoard funding in anticipation of paying back the Bank of England next year."
Yet the more purchasers postpone their decision to buy, the greater the pent-up demand becomes. Few believe that people have abandoned the underlying aspiration to own their own home. Last year's market showed that as soon as there was evidence that the plunge in prices had ended, buyers returned.
The Easter holiday will start to demonstrate whether the market can resume its upward path. Mr Coogan says: "We expect lending over the coming months to remain weak as uncertainty over the state of the economy and the forthcoming election are likely to continue to hold back housing market activity."
Michael Day worries of a double dip, but believes prices will not return to freefall. The risk may be that people are watching for signs of recovery instead of going out and causing one.
Mr Gahbauer believes demand and supply will stabilise at a low level, keeping prices stable. While welcoming the stamp-duty incentive, he warns: "Based on past experience, it may not be enough on its own for the housing market to make a full recovery."Reuse content