How the Government could get things moving again

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The Independent Online
LIKE IT or not, the Government is going to have to do something about the housing market. Not only does the continued fall in house prices threaten to stand in the way of any recovery, it is causing considerable distress for millions of people. The building societies, faced with rising arrears, are beginning to feel desperate. And the political pressure on the Government is increased by the fact that many of the worst hit live in the South-east - where property prices have fallen furthest - and are natural Tory voters.

The raft of rescue schemes that have so far been trotted out by building societies and others would either cost inordinate amounts of taxpayers' money, or have very little impact on the problem, or both. But perhaps more important, there are serious ethical objections to them.

As far as the numbers are concerned, the total value of residential property in this country is about pounds 1,300bn. There are mortgages out to the value of pounds 320bn, so people's equity in these houses and flats is about pounds 1,000bn. In the past year, prices have fallen by about 6 per cent, so there is a loss of nearly pounds 80bn in this equity - equivalent to a third of the Government's entire tax revenues. However much money the Government wants to set aside for housing support, it will be tiny in relation to that fall in house prices.

Most of the 'big idea' schemes designed to lift house prices fail to take this into account: both the Woolwich's call yesterday for a doubling of the ceiling on mortgage interest tax relief to pounds 60,000 and the Abbey National scheme for tax rebates to those who sell homes at a loss would cost a disproportionate amount of money for the benefit they might achieve.

But there are also serious social objections to using taxpayers' money on an enormous scale to try to support private property prices. By and large, property is owned by the relatively well off, while the stream of funds from taxpayers comes from right across the income scale. Of course, there would be many exceptions, but on average the people paying would be poorer than those receiving. Non- property owners would gain nothing but would still have to pay the subsidy.

What is to be done? It is important to be clear that there are two different problems: the damage to the economy from falling house prices; and the distress caused by repossessions, or the inability to move because the mortgage on a property is bigger than the value of that property.

There is no doubt that a rise in the number of people moving would help to end the recession: when people move they pay estate agents, solicitors and the lender, to say nothing of fitting out the property itself. But general efforts to support the housing market are an oblique way of persuading people to spend more money. If the Government needs to boost consumer demand, the most sensible way to do so would be to act directly by cutting VAT, perhaps to 15 per cent, for a short period.

Ultimately, the housing market is a free market, just like any other, and the thing that will underpin it will be a rise in general confidence. There is one very good reason to suspect that the fall in house prices is more or less over, hard though that may be to believe at the moment. The relationship between house prices and earnings is now back to a comfortable level: prices are about 3.4 times earnings. They peaked at 4.75 times earnings in 1973 and 1989, and have not been below 3.2 times earnings since 1972. On historical evidence, they ought to be near their natural floor.

But even if the market picks up, people who are having their homes repossessed, or who are at risk, should be given help, as should those who cannot move house.

There are several ways to prevent repossession, and some progress has been made since the beginning of the year. But the most promising scheme, that developed by the Joseph Rowntree Foundation for mortgage benefits, has yet to be adopted. This is to apply housing benefit, which is available for tenants, to people paying mortgages. More than 80 per cent of those with mortgage arrears are still in work; their problem is that their earnings are too low. A mortgage benefit scheme would cost pounds 800m, but it would target the money precisely where it is needed.

Enabling people whose mortgages are larger than the value of their homes to move is a less immediate problem but just as important. What underpins a mortgage is the income flow of the people who have taken it out; the property is merely security. There is no reason in banking theory why people who have negative equity in a house should not move, maybe to a larger house, taking out an even larger mortgage, provided they can afford to keep up the repayments. They may have lost money now, but over the lifetime of the loan they will move ahead.

To enable building societies to lend more than the value of a property requires legal and procedural changes. But in banking terms there is little objection to making a loan that is larger than the value of the security: it simply means a portion of the loan is unsecured. There is no reason why the Bank of England and the Building Societies Commission should not get together and draw up new guidelines for such lending and suggest whatever legal changes are necessary.

These solutions to the housing problem are not glamorous. They are not even terribly ingenious. But at least they would not involve taking money from the relatively poor to help the relatively rich.

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