Revival in house prices ruled out

Treasury and Bank hit Tory hopes for return of 'feel-good factor' before election
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The Treasury has written off hopes of a revival in the housing market for the next year and possibly longer, casting doubt on the Tories' chances of rekindling the "feel-good factor" in time for the general election.

The Bank of England takes a even gloomier view and does not expect much of a stimulus to emerge before the end of the decade. Home-buyers will also have to become used to facing more frequent periods when house prices fall.

Underlining the depth of the recession in housing, Angela Knight, Economic Secretary to the Treasury, has admitted there will be only a "modest recovery in house prices, starting in the second half of 1996".

The Treasury's lack of optimism will intensify the pressure from Tory backbench MPs on the Chancellor for action to help home-buyers, particularly those facing negative equity.

Right-wing Tory MPs led by John Redwood, the challenger for the leadership, yesterday stepped up demands to restore cuts in mortgage tax relief, to increase it from 15 per cent to 25 per cent in the next Budget, a move that would cost the Treasury pounds 900m a year.

They want the Chancellor to concentrate on targeting tax cuts on "natural" Tory supporters by increasing tax allowances for homeowners, pensions and the family, rather than cutting the basic rate of 25p in the pound.

However, John Major is keen for the Chancellor to make progress in the next Budget on the manifesto pledge to reduce the basic rate to 20p. Fears over the housing market will be heightened by an article in the Bank of England's Quarterly Bulletin to be published on Wednesday, which says that a move to lower general inflation means "house price falls would be more common", prices would be more stable than the 1980s, and there will be less demand to buy houses as a hedge against inflation.

Although Mr Major made it clear in a recent speech that the value of mortgage tax relief at source (Miras) will be protected until the election, the Chancellor is determined not to reverse the cut in the relief.

The hoped-for rise in house prices is the only solace offered by the Treasury for thousands of buyers unable to move because of negative equity.

The Bank criticises statistics on negative equity, including its own, as increasingly inaccurate and says they are not a good enough indicator of "housing distress". Figures for arrears and repossessions deserved at least equal attention, it said. The Bank adds that its past estimates of the extent of negative equity have been too high because of the statistical problems.

It suggests the number caught in the trap could be 925,000 rather than the 1.1m estimated for the second quarter of this year. The value of their negative equity may be pounds 4.3bn rather than pounds 5bn.

Mr Redwood said on GMTV that his call for cuts in public spending of pounds 5bn to make way for tax cuts would be a "good down payment".

Leading article, page 12

Bank's warning, page 15