When an unpopular politician confronts an insurmountable difficulty, a dubious rescue plan is sure to follow.
As property prices continue their remorseless slide, Alistair Darling has instructed his Permanent Secretary to come up with some initiatives to save the housing market. Like any good civil servant, he passed the instruction down the food chain to the treasury staff. As expected, they have produced a motley collection of half-baked ideas that Darling will embrace like a drowning man clings to a wooden crate.
The package comprises of four terrible ideas.
Income support for mortgage interest payments for homeowners who lose their jobs
Presumably, the objective of this measure is to prevent repossessions rising as unemployment ravages the economy.
There was a time when unemployed mortgage holders could claim income support. The government abolished it because it was simply too expensive. Since its abolition, mortgage payments as a percent of average wages have skyrocketed. Darling will need the provide the mother of all social security budgets if he attempts to cover 100 percent of mortgage payments of unemployed homeowners.
The government could put a fixed limit on income support, but people who only pay 25 percent of their mortgage payment typically still end up with their homes being repossseed. He could pay 100 percent for a limited period, but that only delays the rise in repossessions. If he makes the scheme permanent, then people will have a strong incentive to stay unemployed.
Suspending stamp duty so buyers only pay the tax after several years in their new home, or perhaps not until they sell the property.
Eliminating a transaction tax like stamp duty will bring overall house prices down a few points. However, prices are falling anyway. So it is hard to justify eliminating this tax on the grounds that it will improve affordability.
It will not increase the number of transactions; that depends on mortgage approvals, and UK banks are running very close to the precipice of insolvency. Stamp duty offers no assistance for that particular difficulty.
Besides, elimination is not what Darling has in mind. He only wants to delay stamp duty, not abolish it. Again, it is difficult to see the point of this idea. Paying stamp duty over several years only delays the pain, it does not eliminate it. In principle, it will have a minimum effect on the price of a house, since sellers will factor in this cost when they sell their homes.
However, tinkering with stamp duty will have serious tax revenue consequences. In recent years, the government has done well out of stamp duty. Today, the fiscal deficit is rising sharply and eliminating this important source of revenue is irresponsible. This, perhaps, explains why Darling is considering a delay rather than abolition. It gives him the opportunity to look as if he is helping when in fact he isn't doing anything at all.
Creating a new, tax-free fund to help first-time buyers raise the deposit they need to get on the housing ladder.
I love this idea. It would quickly turn into a massive tax break for the rich. Wealthy parents could reduce their taxes simply by giving money to their children, who would put it into tax-free first-time buyer deposits.
The government could try to limit this tax free allowance, but that defeats the purpose of the measure, which is for first time buyers to accumulate huge deposits to cover increasingly large deposit requirements from mortgage lenders.
Buy empty properties particularly in city centres, and turn them into social housing
This is a crude speculator bail-out. Everyone knows that those city centre properties are massive over-priced and that it is only a matter of time before prices fall dramatically. In many cities, prices are likely to fall by 50 percent.
If the government piles in now and buys them up, they will give temporary support for the current inflated price levels. When local authorities later try to sell these properties, they will incur huge capital losses.
Renting is not an option. Rental values are far lower than mortgage costs. If local authorities buy these properties, the financing costs will not cover the income generated from renting them out.
In short, this idea can only lead to massive public sector losses.
What should Darling do?
Nothing. By any sensible measure, house prices are massively overvalued. Any attempt to delay or limit the price adjustment underway will only serve to create further problems. The government can try to support the market. For a time, it may even succeed. However, the cost to the taxpayer will be massive.
Darling should not forget that the taxpayer is already down three billion quid on account of Northern Rock. Providing additional social security benefits to home owners; eliminating stamp duty; providing tax breaks for mortgage deposits; and a government buy-out of speculative inner city appartments simply passes the cost of this mess onto taxpayers. That would be unfair, unprincipled, and unforgivable.