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Home truths

Ever since reading Alistair Darling’s interview in The Guardian in which he was highly pessimistic about the state of the UK economy I have tried to work out exactly what he meant by his comments.

The bit about the public being “pissed off” with Labour is fairly understandable – that’s because many of us are. It is the bit about “arguably the worst economic crisis in 60 years” that I cannot get my head around, basically because the period from 1948 until the end of the 1960s was not all that bad.

Yes, in the immediate aftermath of WWII, there was still a period of austerity and rationing.

But on the whole, the economy grew, unemployment remained at incredibly low levels – barely 2 per cent of the population. Inflation, which had briefly risen above to 10 per cent as the war ended was falling sharply by 1948 and dropped to around 3 per cent by 1950.

The British economy adjusted to the post-war period fairly well overall so why Alistair Darling’s reference to that period?

At one point last week, I was almost prepared to give him the benefit of the doubt. It occurred to me that the post-war boom experienced in Britain after 1945 would not have been possible without massive aid from the US as part of its Marshall Plan for Europe.

Between 1948 and 1951, around £3.4bn – the equivalent of almost £90bn in today’s money – was pumped into the British economy from the US. We know the Treasury has been carrying out a review of its fiscal rules – was the Chancellor preparing us for a massive increase in public spending to stave off recession?

I also wondered whether Darling was trying to “influence” the MPC’s base rate decision last week by exaggerating the scale of the economic crisis.

If so, it would have meant Alistair Darling was playing a much cleverer game than we were giving him credit for so far. The big question, of course, was whether he really was that sharp.

Well, by the middle of last week, it became clear he was not that clever after all. The pound began to fall even faster against the euro and the dollar, driving up the cost of imported goods, including food and clothing, and the MPC left the base rate unchanged.

Meanwhile, Labour’s “big idea” to help the housing market out of its crisis, turned out to be a damp squib. After all, what kind of a fool could imagine that a market worth £4,000bn might be stabilised by spending £1bn, even assuming those figures are not dodgy, which they emphatically are.

Suspending stamp duty for a year on homes under £175,000 is pointless. All the Chancellor has done is open a tiny £50,000 window for people buying a property between £125,000 and £175,000.

The Treasury suggests this will benefit as many as 500,000 homebuyers in the coming year. Yet in May, the last month for which Land Registry figures were available, just 15,000 transactions took place between those levels.

Falling prices since then and a market exodus by first-time buyers will reduce that number further. My own estimate is that the Treasury is actually surrendering just half the stamp duty it claims will be foregone.

Besides, many properties in the South-east of England cost over £250,000. Buyers there will still pay a whopping 3 per cent in stamp duty. What it means is that a Macclesfield hair salon owner buying a home under £175,000 would benefit but not one in Surbiton paying more than £250,000. How fair is that?

As for the Home Buy Direct shared-equity scheme, where government and developers will offer first-time buyers earning less than £60,000 a loan of up to 30 per cent, what happens once the five-year “interest-free” period is up?

Homebuyers will be asked to pay an unspecified “fee”. It is quite possible that they will end up paying more, saddling themselves with huge additional costs as they try to convert their interest-free loans to ones charged at the prevailing market rate.

Besides, by restricting the loan to new build properties, Home Buy Direct distorts the market and may actually divert people from purchases they had already planned to make, causing existing housing chains to collapse. Again, there are issues of fairness to consider – why should you be denied a loan if your chosen home is, say, more than a few years old?

As for the scheme to help people who cannot afford their mortgage payments, this does not involve “new” money. The Government is simply bringing forward some of the £4.8bn already allotted to housing associations and other social housing providers for the next three years, including £200m which Caroline Flint, the housing minister, announced in the spring for this specific purpose.

This amount will only help a few thousand families in total, hardly enough to dent a rising tide of at least 60,000-70,000 repossessions on the next 12 to 24 months.

By its very insignificance, this package has underlined Labour’s inability to affect what is happening in the property market. What homebuyers needed was serious proposals for reform, especially of stamp duty. What they received instead was tokenism.

As a result, the vast majority of prospective homebuyers will take note of what is happening and refuse to commit to buy – or to vote Labour. And who can blame them?

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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