Leading article: The best hope for housing is a continued fall in prices

Given that scarcely a day has gone by this summer without some bad news about the housing market – another month-on-month or year-on-year fall in prices, another record low number of mortgages granted, the total stagnation of sales leading to lay-offs far beyond estate agents – it was sensible for the Prime Minister and his government to begin their autumn "fightback" by offering some consolation in this area. Unfortunately, when the long-awaited package came yesterday, it not only fell short of the expectations that ministers had perhaps irresponsibly seemed to raise, but posed questions about the Government's capacity for joined-up thinking.

The measures came in two distinct parts. The first was the year-long "stamp-duty holiday" on residential property sold for less than £175,000. Such an announcement was long overdue. The speculation about changes to stamp duty that the Chancellor had declined to quash in recent weeks was the single biggest reason why an already sluggish market had ground to a complete halt. No one in their right mind would complete the purchase of a house liable for stamp duty if they had reason to hope that the tax would be lowered or abolished. That the uncertainty was allowed to fester at all reflected a failure of government to anticipate the consequences of its own signals.

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Now that the position has been clarified, the market – at least in some sectors – may perk up as sales placed on hold are "unfrozen". One likely result is an increase in sales registered this month, which will allow the Government to claim that its measures have had the desired effect in galvanising the market. This will not be completely true, as it will reflect an artificially created backlog. Where it might be true is in sales of homes below the new, and perhaps temporary, stamp-duty threshold. It is estimated that half of all transactions could now be exempt from tax. The effect will be distinctly limited, however, in areas of high house prices, such as the south-east and sought-after rural areas, where first-time buyers will still find anything except the smallest flat out of reach.

The second element of the package appeared at first sight to be designed precisely with these exasperated first-time buyers in mind. Anyone wanting to buy their first home with a household income below £60,000 will qualify for an interest-free loan of up to 30 per cent of the value. This can be seen as an attempt to address the loudest complaint of recent months: that mortgages at an affordable rate of interest are restricted to those with large deposits. The advances that first-time buyers had become used to, of 95 per cent, 100 per cent or even more, against a self-certified declaration of income, are now a thing of the past.

That such mortgages might have been at least partly responsible for the sky-rocketing house prices of recent years is rarely mentioned. And it is a hard-hearted person indeed who would point out that the increase in repossessions is all-too-predictable proof that the inflated mortgage party is over. But it is true, for all that. And it poses a real dilemma for the Government: what to do about those who have borrowed imprudently in times of plenty and now find themselves threatened with homelessness, at a time when social housing is in desperately short supply.

The solution offered yesterday, that overstretched owners could sell all or part of their home to a council or housing association and rent it back, is an idea that owes much to the imaginative thinking broached by the Liberal Democrat Treasury spokesman, Vincent Cable. It is a good idea, and one that is least likely to distort the market.

The same cannot be said of the interest-free loans for first-time buyers. Not only could such loans push prices up, but it has to be asked whether ministers really should be trying to make it easier for deposit-less first-time buyers to enter the housing market at all. Is it wise for anyone to buy a home entirely on credit at a time when prices are falling? The more closely the proposed interest-free loan is examined, the less it looks like a measure that will help hard-pressed first-time buyers and the more it looks like a sop to overstretched construction companies complaining about being stranded with unsold stock.

What is happening in the UK housing market is a correction, prompted in part by the global "credit crunch" and in part by our very own inflated prices. This correction might be painful for existing home-owners, and the many branches of the economy that fed off the bloated market. It is certainly painful for a government that relied so heavily on housing credit to keep the economy growing. But it is the best possible development for first-time buyers, whose interests will only be damaged by government intervention that tries to buck the market. What is needed is not tinkering of the sort announced with such fanfare yesterday, but a return to sound economic basics.