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A suitable case for treatment

Our panel consider Budget measures and particularly help for first-time buyers

The Panel
Jonathan Cornell
, head of communications, First Action Finance
David Hollingworth, head of communications, London and Country Mortgages

There was not a lot on the mortgage market in the Budget. What did you make of the announcements and what would you have liked to have seen?

Cornell: There are a lot of things we would have liked to have seen to help kickstart securitisation, to help lenders secure more funding but they were never really likely to happen. The Government’s opinion is the mortgage market needs to fix itself, market forces need to find a solution, so there was never really going to be a silver bullet that ended with mortgage brokers think it’s Christmas.

What the Government has done is pretty sensible, the scheme to help first-time buyers is good, although undoubtedly the builders will be jumping for joy as they are the biggest winners. The suggestion to set stamp duty to the average property level for bulk purchases makes good sense.

The announcement that the Chancellor is going to close some of the loopholes that mean incredibly rich people who can afford the legal advice can sometimes bypass stamp duty has got to be good. Tax has got to be paid by everybody, not just those who are not rich enough to find a way out of them.

Hollingworth: The first-time buyers’ announcement was a lot more positive than we had anticipated. It will be limited in the number of people it can help but it is still better to have these initiatives than not.

In terms of the stamp duty exemption for first-time buyers, that is under review, so we will have to wait and see but we might have hoped to see that extended. It would not have changed the state of the housing market but it would provide some extra support.

The other measures were fairly limited. It looks like stamp duty mitigation schemes will come under the spotlight as part of the closing of loopholes the Government is targeting. A lot of people were hoping stamp duty would get an overhaul. I cannot say I expected that but the calls will go on and on.
The extended support for mortgage interest was a positive move.

There were a lot of positives there from a Budget where we did not have too high expectations for lots of help for the housing market.

The Council of Mortgage Lenders recently called for an overhaul of stamp duty from the current slab approach, where duty is paid on the total value of the property at the highest rate, to a marginal – rate approach. Would you support such a move?

Cornell: It is an incredibly sensible idea that most people in the industry have been calling for for years. The problem with the previous Government was they were receiving so much money from stamp duty they did not want to do anything that would rock the boat. The current Government does not really have any scope to do it either.

To make it work, they would need to set some pretty high levels of stamp duty at the upper levels on big properties and it would be incredibly unpopular.
At some stage, we have got to hope the Government bites the bullet and gets rid of these ridiculous thresholds that create the problem where, at certain levels, such as £250,000 and £500,000, normal reality is suspended.

Hollingworth: It needs looking at because you get such a polarisation of prices around the different bands. You have got the new band coming in for £1m-plus homes, so you will get a lot of people trying to complete before that comes in. This polarisation has always a problem and is used by a bargaining tool by buyers. If you can try to eradicate that, you will get a fairer system but where we are we are unlikely to embark on a major overhaul.

Lloyds TSB recently launched the local lend a hand scheme to help first-time buyers. What is your opinion of the scheme?

Cornell: It is good to see innovative schemes to help people get on the ladder but I am not sure it is local authorities’ responsibilities to help first-time buyers.

Obviously, we hope house prices will not crumble around us and that the people who take part can keep paying their mortgages but there is a risk with this scheme that if people are not able to pay their mortgages and properties are repossessed in negative equity, then that money will come out of the money that has been lodged with Lloyds by the local authority. Local authorities do not have much money to throw around at the moment, so they cannot afford to lose any on schemes like this.

Hollingworth: Let’s not overstate how many people will be likely to benefit. At this pilot stage, we do not really know how much local authority funding will become available.

But it could work well and the key is it could help people who do not have the option of falling back on mum and dad. We often talk about parental help as being a given but that is not the case for everyone, so it opens up an alternative for people who do not have that help.

Capital Economics recently said that bank rate would have to hit 3.25 per cent in two years time before it would make sense to take out a fixed-rate mortgage now. Do you agree?

Cornell: It is difficult to know what their analysis is based on. I had a look for the figures because it depends on where you start from. If you are with a lender with a high standard variable rate, then you can remortgage on to other lenders’ fixed rates at lower levels.

Similarly, the Capital Economics’ calculations probably assume that lenders will pass on any base rate increase and no more, whereas in the past we have seen quite a few lenders increase their SVRs by more than the base rate increase.

It would be nice to know where Capital Economics’ figures came from but, after much investigation, I could not find it.

Hollingworth: When you look at it in terms of what current forecasts are likely to be, and it is likely that base rate is not going to rocket, therefore variable rates so look like an attractive proposition. But the key to this is it is all forecasting– there is an element of uncertainty here.

Economists can change their mind and it is their prerogative but, for a homeowner, quite often, it is a decision based on what they feel more comfortable with and they do not want to be wondering what the monetary policy committee is doing from one month to the next.

Homeowners will take a view based more on peace of mind and, let’s face it, fixed rates are at a low level at the moment. The reality is that many will go for a fixed-rate option this year.

Whether this will be the cheapest deal is a case of trying to second-guess the market and that is something beyond most and they should be careful not to dabble too much. By all means, go for a variable rate if you feel happy with it and can deal with the situation but there is a bit more to it. But people like the idea of knowing where they stand.

The Institute of Public Policy Research recently published a report which predicted that at current estimates, there will be a shortage of 750,000 homes in the UK by 2025. What measures would you like to see to tackle the housing shortage?

Cornell: We need to move to a situation where there are more sensible planning laws, which is one of the things the Chancellor was proposing in the Budget, that the default answer to planning should be yes, unless there is a very good reason not to.

At some stage, we have to look at building a lot more houses in green-belt land and while that is not a very attractive idea for people who live on the edge of these areas, the sad fact is if we do not build a lot more property, there will be a whole generation who will never be able to afford their own home.

Hollingworth: If you get more initiatives like the FirstBuy first-time buyers’ initiative, those kind of ideas will obviously help not only get more first-time buyers looking at newbuilds, it helps to support that side of the industry and may persuade developers to still be putting affordable properties and starter homes into their plans rather than turning their attention to the other end of the newbuild market, such as family homes.

It is a major issue. If you do not get a supply of new property coming in, you are only going to exacerbate the whole problem of supply and demand which will keep prices high.

I am not suggesting this will turn things round on its own but small measures like this can help bring buyers back to the newbuild sector. You have got to remember lenders remain pretty cautious about newbuild, so things are far from easy.

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