Darling fails to take action over slowing housing market
Alistair Darling’s Budget has failed to offer any immediate support to struggling home owners or first-time buyers despite the faltering property market and threat of negative equity.
Calls for higher stamp duty thresholds were not taken on board by Darling. Instead, he unveiled a new scheme that will allow key workers and first-time buyers to buy half of their home, with housing associations owning the remaining 50%. He also championed long-term fixed rate mortgages of up to 25 years and reiterated the government’s commitment to building more houses.
Michael Coogan, director general of the Council of Mortgage Lender, said: "There was little of immediate concrete substance for the housing or mortgage markets in this Budget. While there may prove to be benefits in the long term, the chancellor ducked the pressing nature of some of the issues that are facing the markets right here and now.”
Shared ownership schemes
The chancellor paid some attention in his report to the government’s new shared ownership scheme, which will be introduced this April. Currently, some first-time buyers are able to borrow 75% of their property’s value, with the government and select mortgage lenders jointly funding the remaining 25%. However, the new scheme will see two housing associations helping borrowers with 50% loans, with mortgage lenders providing the remaining 50%.
Buyers would then repay their mortgage, while paying rent to the housing association. Over time they will have to option to “buy out” the housing association, meaning they can gradually increase the equity in their home.
Darling revealed in his Budget that buyers on this scheme will be exempt from stamp duty if they own less than 80% of their property.
However, there is concern that this would discourage them from repaying their loans and increasing the equity they have in their homes. It is also unclear who will monitor buyers to ensure they pay stamp duty once they hit the 80% equity mark.
Currently, the majority of mortgages in the UK are fixed for two or three years. However, in his Budget Darling called for more innovation from mortgage lenders to encourage borrowers to fix their mortgage rates for longer and avoid payment shock if interest rates rise.
Darling said: “I want more people to have the choice of long-term fixed rate mortgages. These protect borrowers from risks and still allow them flexibility to move, or get a new mortgage if rates go down.
“Today, however, most people in the UK have short-term fixed rate mortgages for two or three years, leaving them exposed to interest rate rises when their mortgage deal ends.
“This is not the case in other countries, such as Denmark where the majority of homeowners take out long-term fixed rate mortgages.
“I want to see more flexible and affordable long-term fixed rate mortgages for 10, 20 or even 25 years.”
He failed, however, to expand on how the government intends to encourage mortgage lenders and borrowers to embrace long-term products.
Adrian Coles, director-general of the Building Societies Association, said: “What is required now is to generate customer interest in them. They are a useful option but a significant change in the public’s perception of the benefits of long-term fixed rate mortgages will be necessary for these products to really take off.”
Cheaper mortgage rates
Current market conditions, sparked by the credit crunch, have meant lenders in the UK are unable to secure funding for mortgage lending. This has resulted in higher mortgage rates and even some lenders going out of business or closing their doors to new borrowers.
Lending criteria has also tightened, with several banks withdrawing their no deposit mortgages.
As Darling pointed out, 30% of mortgages agreed in the UK in 2006 were funded through secondary funding markets rather than customer deposits.
With these funding markets closed down, Darling says it is imperative that lenders have access to stable and low cost funding so that mortgage rates can come down as soon as possible.
He said: “We will bring together, investors and lenders with the Treasury, the Bank and the Financial Services Authority to find market-led solutions to strengthen these funding markets further.”
This group will report back to the chancellor in summer 2008 and any proposals will be presented at the time of the 2008 pre-Budget report.
Darling told Parliament that the best way to improve long-term housing affordability and stability in the UK is to build more homes.
The government has previously made a commitment to build three million more homes by 2020 and Darling announced that in addition to the 40,000 already under construction, the government has identified sites for 70,000 more homes.
Sale and rent back schemes
Controversial sale and rent back schemes will be reviewed by the Office of Fair Trading, Darling confirmed today.
These schemes are not currently regulated in the same way as mortgages. They work by companies or individuals buying a property for under market value and then renting it back to the original owner. However, there have been concerns that some schemes target vulnerable home owners such as the elderly or those in debt.
There has also been criticism that many schemes only allow the original owner to rent back the property on a six-month lease – meaning after this time they could be left without anywhere to live.
Darling said: “Some stakeholders have expressed concerns in light of the recent growth of the sale and rent back market. This market offers some home owners the option of selling properties at discounted rates in exchange for tenancy arrangements.
“The OFT will lead a study of this market this year, focusing on consumers’ experiences of these arrangements and consider options where appropriate to strengthen consumer protection.”
Coogan said this was a “welcome” measure but warned of a lack of apparent urgency on the part of the government.
He warned: “There is no timescale for any measures to tighten up requirements on those operating in this sector.”
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A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.