The Abbey National proposed that home-owners should be allowed to offset their property losses against their income tax when they move house, as a way of boosting activity in the market, widely seen as the key to a general economic recovery.
The plan for tax relief came as the Nationwide Building Society announced a 0.5 per cent fall in prices last month. The average price of a house in July was pounds 55,414, which is 6 per cent less than in the same month last year, according to Nationwide's figures.
Those figures indicate that prices have resumed their slide after some signs of recovery at the time of the general election. Purchasers are so worried that transactions are near an all-time low.
Lenders believe that one of the major obstacles to recovery in the market is that many thousands of people are now trapped in homes where their mortgages are larger than the value of the properties.
Abbey National is proposing a scheme which it believes could break this logjam. Its 'tax credit' plan would involve the Government in compensating homeowners for losses on their properties.
For example, a house bought for pounds 60,000 and sold for pounds 54,000 would result in a loss of pounds 6,000. Homeowners would receive that amount from the Inland Revenue as an offset to their tax bills. If the tax bill is smaller than the property loss, they would receive the difference as a refund cheque from the Inland Revenue. The scheme would be available only to those selling their main home and buying another for their own occupation. It would phase itself out as house prices recover.
Abbey National said there would probably have to be a ceiling on the compensation, perhaps pounds 10,000. But different ceilings might be set for different parts of the country.
The bank has used figures from the Council of Mortgage Lenders (CML) to estimate that about 375,000 mortgages outstrip the value of the properties on which they are secured and that the average loss would be about pounds 2,662.
Sir Christopher Tugendhat, Abbey's chairman, estimated that the full-year cost would be some pounds 250m, but John Wriglesworth, the housing analyst at UBS Phillips & Drew, estimated the cost could be six times as high, since he estimates 1.5 million people have mortgages bigger than the value of their homes. 'I think the idea has merits, but it is far too costly. My cautious assumption is that it would cost the government some pounds 1.5bn,' he said.
David Gilchrist, group general manger at the Halifax Building Society said: 'It does not directly target the first-time buyer which is the engine of recovery.'
Steve Wilcox, co-author of a recent Rowntree Foundation report on mortgage rescue schemes believed that if the Government compensated people for losses on their homes, it would also have to tax their profits. At present an individual's principal home is exempt from capital gains tax.
Professor Duncan Maclennan, director of Glasgow University's centre for housing research, estimated that the scheme could mean the loss of pounds 5bn in tax
revenue. He told BBC radio that the flagging house market could be revived by two measures calling for much lower injections of cash. A mortgage benefit scheme which would stop homes falling into repossession and the downward spiral on prices could be introduced for about pounds 750m, Professor Maclennan said.
The second measure - an expansion in housing association budgets in targeted areas to enable them to take a significant proportion of unsold stock off the market - could cost between pounds 1bn and pounds 1.5bn.
The Government also faced pressure for action from its own supporters. Sir Rhodes Boyson, a senior Tory backbencher and former environment minister, said if interest rates could not be cut to get the economy and the housing market going, help had to be given to people whose homes might be repossessed.
Robin Cook, Labour's trade spokesman, said: 'The best measure the Treasury could take to address the housing crisis is to let councils build some houses.'
Leading article, letters, page 14
Abbey National results, page 16
View from City Road, page 19
(Table omitted)Reuse content