We seem to have reached the stage in the credit crunch where a futile gesture is called for. On hearing the news that the Treasury is considering a plan to defer stamp duty on houses, it’s hard to know whether to laugh or cry. Laugh because the idea is so footling in the context of the hurricane blowing through the housing market – the idea is not even to scrap stamp duty, but simply spread the payments over a longer period; cry because it looks like yet another example of the Government playing fast and loose with taxpayers’ money to secure short-term advantage.
It’s as if Alistair Darling, the Chancellor of the Exchequer, had not read the report he had himself commissioned from former Bank of Scotland boss Sir James Crosby on the UK mortgage finance market, which was published last week. In it, Crosby spelt out the scale of the problems facing the housing market. Between 2001 and 2007, the wholesale mortgage funding markets (securitisations and covered bonds) grew from £13bn to £257bn, nearly 20% of the total UK mortgage market. In 2006, the wholesale markets financed two-thirds of new mortgages. Those markets are now dead. Yet in the next three years, British banks must find a way to refinance three-quarters of the outstanding debt.
Where is the money going to come from to refinance this debt, let alone to finance new mortgages? In the short-term, the best hope is bank deposits. But Crosby doesn’t think we should hold our breath: the UK saving rate is currently just 1.1%, the lowest since the 1950s, and with household bills rising ahead of the official inflation rate, the chances of large quantities of cash hitting the banks are slim. Yet banks are still forced to push up savings rates to attract what deposits are available, which means mortgage rates are sure to continue to rise, thus putting more pressure on the housing market.
In this context, how might a stamp duty deferral – or cut, for that matter – help boost the housing market? Will it help bring back 125% mortgages, liar loans, crazy income multiples and all the rest of the insane bull market lending practices? Of course not. What it will do is deprive the cash-strapped Exchequer of much-needed revenue. Stamp duty may be unpopular, but it is easy to collect, most people only pay it once every ten years or so, and it is economically neutral, since buyers simply adjust their offer price to take account of it. Abolishing stamp duty might give a small, one-off boost to house prices – nothing like enough to offset recent falls – but it won’t affect the amounts buyers need to borrow.
But while a deferral of stamp duty is neither here nor there, the real worry is what it says about an increasingly desperate Government’s willingness to take extreme measures to bail out the housing market. The only real way to stop the slide in prices is to get the wholesale market going again. But as Crosby makes clear, this could be years away. Banks used to buy mortgage securities because they thought they offered liquidity and a low risk of default. That now seems hopelessly naïve. Confidence will not return until prices have fallen to more realistic levels, lending standards have improved and credit rating processes reformed.
Still, there is a fast-track way to get the market going again: the Government could just offer to take on the mortgage risks itself, either by guaranteeing mortgage bonds or letting the Bank of England finance new mortgage securities. To Alistair Darling, this must seem tempting. But it would be a mistake: first, it will actually prolong the crisis, as it will make it harder for the private wholesale market to re-emerge; second, it could lead to huge losses for future taxpayers, as the US has discovered, following the recent rescues of Fannie Mae and Freddie Mac, the Government-sponsored agencies.
If Darling was a strong Chancellor, he would resist pressure for futile bail-outs and explain that we have little option but to see this correction through. That will be painful for many of us, but passing on the bill for mistakes made by this generation to the next would be deeply dishonest – and would not necessarily leave us any better off. Sadly, Darling is not a strong Chancellor.
The Olympic storm in a teacup
The Beijing Olympics are upon us and the world waits with bated breath. In the markets, the Games have been almost as keenly anticipated as in the world of sports. So much so that the whole thing has taken on almost mythical importance. Some say the Chinese government will show its true face when the games are over. But how? Will China finally revalue the renminbi? Will it start throwing its weight around and bumping up global tensions? Theories abound. But my bet is that these Olympics will be no different to any other: for three weeks, the world will be mildly diverted by the sight of grown men and women running around in circles and jumping over sticks, then they will go back to doing whatever they were doing before – leaving the host city to wonder whether the enormous expense was worth it.
• Simon Nixon is executive editor of Breakingviews.com