Lamont considers action to aid home-buyers: The Chancellor examines policy options as ministers warn that low inflation offers little hope for people caught by falling property prices

THE CHANCELLOR is considering a range of options for helping home buyers in the Budget, Treasury sources said last night.

The options could include raising mortgage tax relief from pounds 30,000, the limit fixed in 1983, but John Major has been reluctant. It costs pounds 6.1bn a year.

The Treasury has dismissed as 'unworkable' some Tory demands for it to be doubled to pounds 60,000 for first time buyers, because of the difficulty of identifying those who should qualify.

The Stamp Duty holiday, which ended this week, has been judged a failure. The Treasury is being pressed to undewrite new mortgages for homeowners whose properties are worth less than their mortgages.

The Treasury has been resisting demands for an emergency housing package. The disclosure that Mr Lamont is reviewing action may revive hopes, but some Tories say the Budget next March would be too late.

Ministers yesterday said that householders will have to get used to an era in which house prices are no longer an odds-on hedge against inflation. 'You cannot argue for low inflation and make an exception of housing,' said one ministerial source.

Ministers believe the Government's policy of seeking low inflation could therefore herald a change in attitudes towards housing. A house will be seen as something to live in, rather than as an investment like stocks and shares.

But the Treasury denies that it is seeking to change people's attitudes to housing as an objective of policy. 'If you live in a low inflation, sound money environment, then people's attitudes towards housing will change, but that is not a policy objective,' said the source.

Ministers also believe that many banks and building societies are now reverting to more prudent behaviour over loans and the gearing ratio with borrowers' incomes.

Gordon Brown, the shadow Chancellor, this week called on the Prime Minister to hold formal talks with the lenders. But Labour also has no easy solutions to the dilemma facing many over-stretched borrowers.

'Negative equity' - when the asset value of a home has fallen below the level of the mortgage - has become a buzz-word. But there are few proposals for curing it.

Tory MPs, while holding firm to the Chancellor's strategy for squeezing inflation, have expressed alarm at the rising number of mortgage holders faced with the prospect of a lifetime of debt. Many are young first-time buyers who bought when the market was booming and needed a big loan to buy any home.

John Butterfill, vice-chairman of the Tory backbench finance committee and MP for Bournemouth West, said action was needed on the 'debt trap'.

Mr Butterfill, a chartered surveyor, said: 'I don't think we can bail out everybody with a mortgage that is now more than their house is worth. Where I do think there is a problem is there are quite of lot of young people who have borrowed more than their house is now worth who need larger accommodation.

'They could afford to service a larger loan but they cannot trade up because they cannot capitalise on it. I think building societies ought to do something about that.'

The Liberal Democrats too are wary of offering instant answers. Their long- term proposal is for turning mortgages into rents, but that would not offer immediate help for someone whose home is now worth less than their mortage.

One Labour source said: 'There is not much you can do for someone whose home is no longer worth as much as their mortgage, apart from hoping that the market will pick up.' Labour wants a cut in interest rates. That would require a fundamental change in the Government's economic strategy with the realignment of the Deutschmark, a move which Norman Lamont and John Major have rejected.

Clive Soley, the former Labour housing spokesman, now on the backbenches, said nothing short of the reform of housing finance in Britain would provide a solution.

He said building societies should be encouraged by tax breaks from the Treasury to become landlords, taking over the 70,000 empty properties which were now on the market for sale, and offering them to tenants, through councils and housing associations, to let.

That would help homeless families, and ease up the slack in the housing market. 'The idea of giving additional tax breaks to individual householders is a nonsense,' he said.

'Inevitably, you would have to phase out the taxbreak which would not be popular, and the MIRAS bill would increase. What we need to do is direct subsidies away from the higher earnings towards lower earnings at the same time as offering tax breaks to people to become landlords.'

The Government blames the Rent Act for destroying the rented sector by holding rents down. Critics argue that the move to market rents has failed and rents are unreasonably high.

The silver lining to the housing cloud could be the revival of the rented sector at rents people can afford.