...a blog by Richard Flowers

Friday, September 05, 2008

Day 2802: Sooty's Stamp Collection


The announcement from the Treasury is pretty bald about it:
"The Chancellor of the Exchequer has today announced that stamp duty land tax will not apply to purchases of residential property of £175,000 or less."
Quite what the outcome will be is more difficult to tell.

For houses priced just a little bit OVER the new limit, it may actually push their price down further; on the other fluffy foot, for anything priced LESS than a-hundred-and-seventy-THREE thousand you might see the price ease a little up as SELLERS absorb the Chancellor's largesse. Or possibly NOT as GAZUNDERING overtakes GAZUMPING as the sharp practice du jour in a buyer's market.

What we DO know is that it probably won't work to re-inflate the housing market.

We know this because

a) Mr Norma "yoghurt-pot" Lamont tried it to no effect in the last housing crash;

b) Mr Gideon "empty yoghurt-pot" Oboe says we should try it this time.

More seriously, who would take Sooty's tax break when you could just WAIT A MONTH and the falling house prices would save you the same, if not more?

What we do know is that the UNDERLYING problem is LACK of CREDIT.

Remember that the whole "Credit Crunch" came about because banks were used to handing out cheap credit because they were loaning each other great pots of money in return for "mortgage-backed securities" that were made up of home loans parcelled up and sold on. The "parcels" contained some solid, dependable, sound mortgages from people who never missed a payment mixed in with some rather dodgy ones who might be able to repay you if they have a good day at the dog track mixed in with some that you were never going to see again and may as well have tossed the money down a wishing well. When the banks realised that the worthless sub-prime loans they were holding were – rather than transformed into some credit-worthy asset by the miraculous alchemy of the market – STILL actually worthless, they all stopped loaning each other money because they didn't know, and more importantly didn't BELIEVE, what any of the other banks' assets were supposed to be worth.

That would be why I would hope everyone will back slowly and carefully away from the unexploded proposals from the Royal Institute of Chartered Surveyors that the Bank of England kick start the credit boom all over again by issuing, er, "new mortgage-backed securities - home loans which are parcelled up and sold on to other investors". Sound familiar at all?

Anyway, lack of credit is where some people are getting into difficulty because of having to RE-mortgage, perhaps because they've come to the end of a fixed term deal. The fall in house prices could mean that the value of their home is less now so the bank won't offer them as much of a loan as the amount they already owe. So suddenly they have to find a chunk of capital that they don't have.

Higher monthly repayments for the family home, just as people are facing higher energy bills and higher costs for the weekly shop, are what push people into REPOSSESSION.

So I have a CAUTIOUS welcome for Sooty's package of measures to try and tide people over.

It's a bit of a hotch-potch and the numbers of people to whom a helping fluffy foot might be offered seem quite small, but broadly its heart is in the right place.

It just makes it seem very off that at the same time Sooty is trying to encourage people to get into MORE debt buying into a falling market – what Mr Clogg calls a "bribe to rescue the housing market".

Falling house prices are NOT in-and-of-themselves necessarily a crisis. If you've lived in your present house for a long time, or even not THAT long a time, you will have seen quite a step up in price so you'll just be making a bit less of a profit – and you'll still need another house so the price of the place you are buying will be lower too.

But if you bought RECENTLY, in the last year say, or if you took advantage when the banks were tempting you with seductive offers to increase your mortgage along with the rising value of your home then you COULD end up with a debt that's more than your house is worth.

But even negative equity doesn't HAVE to be a disaster. In the LONG TERM house prices are certain to rise again. No really, they absolutely are. There are quite simply more people who want houses than there are houses for them to have. And that's the very BASICS of a market-forces-led price increase.

So you should just – if you can – sit it out for a while.

Problems arise only if you need to sell your house NOW, perhaps because of a change of circumstances, illness or unemployment, so you can't keep up the repayments. You could end up left without a house but still having some mortgage left over.

Don't let Sooty bribe you into jumping in early; make sure you have a decent deposit saved up and buy only when you are good and ready.

1 comment:

Charlotte said...

I'm a newcomer to your blog, and a little worried that the best explanation of the credit crunch that I've seen has been from a fluffy elephant. Very nicely explained though, and good advice too. It'll be decades yet before I can worry about anything other than the state of my student loan, but I'm British and so I have to follow the state of the housing market.

More power to your fluffy elbow, anyway. Or possibly knee.