Memorandum by The Council of Mortgage
Lenders (CML) (CRED 30)
EXECUTIVE SUMMARY
Mortgage market developments post-credit crunch
— The mortgage market has become dysfunctional,
and this underlies the problems the government's housing policies
are designed to address. It also puts in place a limit on the
effectiveness of those policies in the absence of effective measures
to promote a fully functioning mortgage market.
— The UK mortgage market is suffering
as a consequence of the unique, protracted global disruption to
wholesale funding markets and to inter-bank lending.
— Demand in housing and mortgage markets
has also been dropping away as consumer confidence has ebbed and
perceptions of likely future falls in house prices have encouraged
a cautious attitude.
What more needs to be done?
— Given the above conditions, efforts
to maintain housing supply targets, promote the viability and
activity of housing associations and to protect homeowners may
be of limited effect unless the underlying problems affecting
the funding of the mortgage market are addressed. The Crosby report
may recommend such a plan, which could take the form of government
guarantees for new mortgage lending or direct government support
for wholesale and/or retail mortgage markets.
Housing supply targets
— The commitment of the Council of
Mortgage Lenders (CML) members to all tenures enables the CML
to look at housing issues in the round—not simply focussing
on home ownership. UK housing tenure needs to be flexible and
able to accommodate economic and social change.
— The government should update its
long- and shorter-term projections as to sustainable levels of
home ownership in the light of current market difficulties and
likely longer-term trends in the post-recession environment.
— Government targets for increasing
housing supply are unlikely to be met within projected timescales
given current financial and economic difficulties.
Social housing and low-cost home-ownership targets
— While the National Affordable Housing
Programme is currently on track, new-home starts will tail off
rapidly given the difficult market conditions and constraints
on housing association funding due to the credit crunch.
— Lenders are increasingly concerned
that borrowers accessing shared ownership should have a stake
in the property rather than borrow 100% of their share. Demand
from borrowers for this product is also falling away due to uncertainty
over house prices.
— The current development model of
cross subsidising development for social rent from open market
sales is not deliverable in present circumstances and risks prejudicing
the viability of some developing housing associations. Government
could sanction a move towards a new model focussed on building
for market, intermediate and social renting, with appropriate
levels of grant and/or other support.
The private rented sector
— The private rented sector should
not be neglected in discussions about housing supply and tenure.
It has a vital and expanding role in the tenure mix.
— The Rugg review of private rented
sector housing, commissioned by government, provides a sensible
focus for future development of the private rented sector based
on incentivising investment by both large and small landlords
through tax and other measures and avoiding excessive regulation.
The financial viability and ongoing business of
housing associations
— The CML welcomes the establishment
of the Tenant Services Authority (TSA) and is in close dialogue
with the TSA and the Housing Corporation (HC)to ensure that heightened
risks to housing association financial viability are identified
and addressed.
— There is a need to ensure that the
TSA and the new Homes and Communities Agency (HCA) work together
effectively to ensure both financial viability and sustainable
business growth in the current challenging times.
Measures to help existing and prospective homeowners
affected by the credit crunch
— Lenders see repossession as a last
resort. All first charge lenders are subject to regulatory rules
and treating customers fairly principles overseen by the Financial
Services Authority, industry guidance on arrears management, consumer
information on what to expect during the collections process if
arrears build up, and a pre-action protocol on possession cases.
These measures provide a series of checks and balances to help
existing homeowners in difficulties.
— We welcome the reforms of Income
Support for Mortgage Interest to be introduced in January. However,
the changes should be made permanent, and need to be extended
to more vulnerable borrowers who still do not have an effective
safety net. Coverage for around 10,000 potential claimants does
not go far enough in an environment of rising unemployment.
— We are working closely with the government
on development of its mortgage rescue scheme which is to be launched
in January. Once the scheme is up and running the government should
consider expanding the scheme to help more households.
— The government should use the current
stamp duty holiday to consider wider long-term reform of stamp
duty, which is a barrier on transactions and mobility.
— We welcome the government's help
for first-time buyers through increased shared equity schemes.
However, the current proliferation of schemes needs to be simplified
to ensure maximum participation by consumers and lenders.
INTRODUCTION
1. The CML welcomes the opportunity to submit
evidence to the Communities and Local Government (CLG) select
committee. The CML is the representative trade body for the residential
mortgage lending industry. Its members account for 98% of the
assets of the UK mortgage market.
Mortgage market developments post-credit crunch
2. The mortgage market has become dysfunctional,
and this has significant implications for the government's housing
policies. Therefore, an analysis of current mortgage market conditions
is necessary, together with an indication of the scope of measures
needed to promote a fully functioning mortgage market. Without
such measures, the actions of CLG can, even if well intentioned
and carefully targeted, be only peripheral to the key consequences
of the credit crunch and their impact on the broader economy.
3. The global financial market turmoil,
triggered by deep concerns about the viability of sub-prime loans
in the US, has demonstrated the close inter-dependencies of asset
and credit markets and different geographies. No countries have
been immune from these once-in-a-lifetime financial market difficulties.
We agree with the analysis of the current funding difficulties
in the Crosby interim report[16]
and share his view that the UK mortgage sector has been particularly
badly hit by financial market disruptions.
4. The dislocation of wholesale funding
markets, in particular securitisation, has adversely affected
the availability of funds to support residential mortgage lending.
Securitisation markets expanded strongly between 2000 and 2007,
driven by investors' search for yield and the increasing ability
of issuers to create financial products tailored to individual
risk profiles. UK residential mortgage backed securities (RMBS)
and, to a lesser extent, covered bonds shared in this growth,
with these structured finance products equating to around two
thirds of the £108 billion net increase in mortgage lending
in 2007.
5. The effective closure of these structured
finance markets to UK mortgage lenders is one manifestation of
the more generalised and global hoarding of liquidity by banks
and other institutions, associated with concerns about the value
of mortgage-related assets, the need to refinance maturing wholesale
funding, bad debts and solvency of banks and other leveraged institutions.
6. The majority of the problems being experienced
in the UK stem from the unanticipated massive and protracted disruption
to wholesale markets.[17]
It is important to bear in mind that almost all banks, building
societies and other specialist mortgage lenders have relied on
wholesale markets to finance at least part of their lending. And
even for the small number of lenders that have not, typically
some of the smaller building societies, they have experienced
increasing competition for, and sharp increases in the marginal
cost of, retail savings. Over and above these effects, all lenders
have needed to review and build up their holdings of liquid assets.
7. The consequence in the last 12 months,
and ongoing, has been significantly fewer funds to underpin new
mortgage lending, higher funding costs for mortgage lenders, and
higher prices for and/or reduced access to finance for many borrowers.
Despite the announcement of the bank recapitalisation programme,
these trends will not reverse overnight to re-create funding capacity
at near 2007 levels.
8. Unfortunately, while the slowdown in
our housing and mortgage markets in early 2008 reflected the shortage
of mortgage supply, more recent evidence shows that demand has
been dropping away because of other factors. Ability to pay, perceptions
over job security, prospects of further falls in house prices,
and falling consumer confidence have all started to impact on
households' appetite to buy. Anecdotal evidence also suggests
that demand has suffered because of potential buyers' perceived
or actual difficulty obtaining mortgage finance. In other words,
the reduced availability of mortgages has led some buyers to give
up looking.
9. While these supply and demand trends
persist, real damage is being inflicted on the UK's broader economy
and on the housing market in particular.
Chart 2
NUMBER OF MORTGAGE APPROVALS
10. Mortgage approvals for house purchase
are already running at around one third of last year's levels
(see Chart 2), and it seems likely that 2008 will mark a post-war
low for property turnover, relative to the size of the private
sector housing stock (owner-occupied and private rental). Current
indications also suggest that first-time buyer numbers, strongly
affected by lenders' imposition of lower LTVs requiring larger
deposits, may struggle to hit 200,000 this year—the lowest
level for at least 40 years.
11. House prices are already down around
15% from last year's peak, and could fall by 25% peak-to-trough
in the view of the Nationwide's Chief Executive in a recent interview
with the BBC.
12. This scale of fall would precipitate
the return of widespread negative equity, with 1.7 million borrowers
affected according to Standard & Poor's.[18]
Under such circumstances, significant numbers of households are
also likely to find that their positive equity cushion has shrunk
considerably or become negligible, both discouraging house moves
further and reducing households' coping strategies should they
experience an adverse change in circumstances such as unemployment
or sickness. It also diminishes an important potential source
of funds to help first-time buyers pay their deposits as home
owning parents have become a key source of help with their offspring's
deposits.
13. Indeed, while financial market uncertainties
continue, there is a strong likelihood that property sales will
continue to weaken. Distressed sales may account for a higher
proportion of turnover, raising the prospect of house prices "over-shooting"
in a downwards direction.
14. Recent months have also seen a surprising
weakness of remortgage activity (given the large numbers scheduled
to come off various short-term fixed rate deals), while the latest
Bank of England figures revealed an unexpectedly sharp reversal
in housing equity withdrawal. All of these indicators illustrate
how borrowers are being adversely affected by the more restricted
product offers now being made by mortgage lenders, squeezed household
finances and a general ebbing away of confidence.
15. Given an ongoing shortage in funding
sources and scale, efforts to boost or even maintain housing supply
targets, to promote the viability and activity of housing associations
and to assist homeowners will necessarily be of limited effect
if dependent on private finance. The key issue remains that of
unlocking the proven potential of the mortgage market to help
the government to achieve its housing policies in this post credit
crunch environment.
What more needs to be done?
16. The government's announcement on 8 October
of comprehensive and radical measures to support the financial
system is welcome. The proposed measures address both the need
to strengthen the capital position of banks and building societies
and to ensure that eligible institutions have sufficient access
to short and medium term funds. The co-ordinated decision by the
Monetary Policy Committee to lower official short-term interest
rates by ½% was designed to further bolster confidence. And
it will be helpful if this is followed by further interest rate
cuts sooner rather than later.
17. The tripartite authorities now have
a clear direction of travel, and we believe that the bold measures
taken were necessary to limit the downside risks to the financial
system, the housing market and the wider economy.
18. A resumption of wholesale market funding
continues to be the key to avoiding a vicious circle developing
in the mortgage market where restricted credit availability leads
to falling house prices, heightened credit risk and the further
loss of investor confidence and supply of funding.
19. We believe that a further policy measure
is required, specifically aimed at maintaining the supply of mortgage
credit. The government showed support for the objective of maintaining
the flow of mortgage credit in the Treasury statement of 13 October
on financial support for the banking system. This outlined the
agreement whereby banks receiving support would maintain "over
the next three years, the availability and active marketing of
competitively-prices lending to homeowners ... at 2007 levels".
We await further details on how this is being interpreted by the
government, and how it will impact on the commercial position
of those institutions in the short term (and it cannot guarantee
that consumers will want to borrow at similar levels as we discuss
above).
20. We would advocate an additional scheme
available to lenders across the board, including those that have
not required government support. This could take the form of an
additional system of guarantees specifically aimed at new mortgage
lending, which was mooted in the interim Crosby report.
21. Alternatively, it would be possible
to implement a policy along the lines of that announced this year
in Australia, where the government will purchase RMBS from lenders
to support new lending. Another possible approach would be for
the government to grant blocks of funding to lenders specifically
earmarked for lending on to mortgage borrowers—similar to
the mechanism operated by the Federal Home Loan Banking system
in the US.
22. We would welcome such a measure were
it contained in the final Crosby report expected by the time of
the pre-budget report. But, we believe such a plan should be considered
urgently as it would help to safeguard the interest of taxpayers
by limiting the risk that the housing market overshoots downwards
creating substantial credit losses in government owned and part
owned financial institutions.
Housing supply targets
23. While our members have a particularly
strong interest in home ownership, we recognise that—despite
its many benefits—the tenure is not for everyone all of
the time. As mortgage lenders, therefore, they support all housing
tenures in the UK. Of the £1,211 billion secured against
residential property at mid-2008, 14% or £166 billion related
to other tenures—the majority to private landlords but a
not insignificant £33 billion to social landlords.
24. The commitment of our members to all
tenures encourages the CML to look at the economics of housing
market issues "in the round", not just home ownership.
As a trade body, we understand that UK tenure patterns need to
be diverse and flexible and able to accommodate economic and social
change.
25. In this regard, we see some benefits
in narrowing the divide between home ownership and other tenures
by promoting the so-called intermediate tenure where there is
genuine demand. There is potential for enabling households to
increase or lower their degree of home ownership according to
personal circumstances.[19]
Over the longer term, there may be scope for expanding low-cost
home ownership, though such ownership must be sustainable over
the economic cycle and particular caution should be exercised
over promoting such an option at a time of rapidly falling house
prices.
26. The government should update its long-
and short-term projections as to sustainable levels of home ownership
in the light of current market difficulties and likely longer-term
trends in the post-recession environment.
27. Although housing aspirations fluctuate
over time, broadly speaking reflecting the prevailing state of
the housing market, the preference of the vast majority of UK
households (80% or higher) for home-ownership has persisted over
a very long period of time.
28. For over 150 years, building societies
and latterly other mortgage lenders have acted to help households
realise their aspiration for home ownership. But, over the past
decade and more, economic and social change has presented an ever
more challenging environment.
29. Long before the credit crunch, the world
had become a much less certain place for many (perhaps the majority
of) individuals, with, for example, more widespread experience
of relationship breakdowns, job changes, temporary unemployment,
inadequate pension arrangements and credit problems at some point
in our adult lives.[20]
30. In February 2007, the Communities and
Local Government department issued a research report[21]
acknowledging that higher rates of home-ownership had and would
entail drawing in more financially marginal and vulnerable households
with a consequent shift in the risk profile of the home-ownership
base.
31. As people's circumstances become more
diverse, complicated and subject to financial shocks, lenders
have sought to financially include affected people by developing
extensive new ranges of mortgage products. These have included
remortgages, offset and current account mortgages, buy-to-let
products, self-certified, adverse credit products, lifetime and
Sharia-compliant mortgages.
32. For much of the past decade, strong
and continuous growth in the wider economy and household incomes,
allied with a chronic under-supply of housing provision, meant
that house prices also rose strongly. While the government has
now recognised the UK's lack of investment in housing provision,
and has responded positively and with determination to the Barker
review, all stakeholders recognise that this challenge is necessarily
long-term in nature.
33. It has however suffered a severe setback
as a result of the recent sharp cutbacks in new-build levels.[22]
A number of forecasters are now suggesting that private housing
starts may remain in the 100-120,000 range throughout the 2008-10
period. Given such an outturn, the government's targets for longer-term
net additions to the housing stock would necessitate a historically
unprecedented recovery profile. This seems unlikely given that
concerns have already started to appear about the loss of job
skills in the construction sector. The inevitable conclusion would
seem to be that annual targets will need to be revisited.
Social housing and low-cost home-ownership targets
34. In terms of the government's house building
targets for social housing, the funding market turbulence and
housing market downturn has not had full impact yet on the supply
of new affordable housing. The HC recently reported that the National
Affordable Housing Programme (NAHP) is on track (as at the end
of quarter 2 2008-09). However, it is clear that an impact on
starts is showing and a recent survey of housing associations
saw 54% having frozen their development pipelines which previously
helped to fund social housing projects. This puts the Comprehensive
Spending Review targets of last autumn (45,000 social homes a
year by 2011) in doubt.
35. The delivery mechanisms for affordable
housing put in place by government included extending grant funding
to Arms Length Management Organisations (ALMOs) and developers,
allowing local authorities to build through Local Housing Companies
(LHCs) and encouraging housing associations to "sweat their
assets" and cross subsidise from build for sale.
36. The fundamentally changed market conditions
coming out of the credit crunch mean that these mechanisms will
no longer be as effective in delivering more affordable housing
in the short to medium term. It seems clear, in particular, that
there is a need for a new model and that the continual reduction
of grant rates has created an over reliance on cross subsidy for
both the delivery of affordable housing but also the business
operating models of associations.
37. A shift to increased grant rates and
from open market sales to rental is required urgently if there
is to be an effective short to medium term solution to maintaining
momentum in the delivery of new supply of social housing. Flexibility
of tenure as well as increased public funding are crucial factors
in ensuring that action taken to respond to the current crisis
does not undermine the longer-term viability of the affordable
housing sector and mobility within the wider housing market.
38. The housing association sector and others
are already working on different models of delivering affordable
housing. The CML remains keen to work closely with the sector
and the new Homes & Communities Agency at an early stage to
ensure that any new model does not undermine the existing (and
still hugely important) funding structures for the sector.
39. On low-cost home-ownership, the CML
is still being asked to persuade its members to increase appetite
for shared ownership lending in this post-credit crunch environment.
This is ultimately a commercial decision for members. However,
it should be noted that lenders increasingly feel that borrowers
should have a personal financial stake in the property. Housing
associations with large numbers of unsold shared ownership properties
report that the demand is falling as the uncertainty caused by
house price falls continues.
40. Is focusing on increasing activity around
low-cost home-ownership an appropriate response at present?
The private rented sector (PRS)
41. While the PRS is not specifically mentioned
in the terms of the Inquiry, it should not be neglected in any
discussion concerning housing supply and tenure.
42. The PRS has, over the past 10 years,
been the fastest growing tenure in the UK. It now represents some
12% of the housing stock. It provides a flexible tenure offering
high levels of tenant satisfaction to those for whom home ownership
or social renting are not appropriate or available options.
43. Growth in the PRS has been driven by
several factors. These include:
— De-regulation of the sector and notably
the introduction of the assured shorthold tenancy (AST).
— Social and demographic changes including
lifestyle changes, increased immigration, higher student numbers
and more mobility.
— The development of buy-to-let (BTL),
which has financed a major expansion in provision plus improvement
in standards in the PRS, which are now on course to converge with
those of other tenures over time.
44. The PRS is now a very different sector
to that which existed 30 years ago. Yet landlords still suffer
from a poor reputation that is largely unjustified but which carries
the threat of further well-intentioned regulation that risks stifling
the investment and enterprise that has proved so successful. Those
risks are significantly enhanced against the backdrop of the credit
crunch, which has, in the short term, caused a downturn in investment
by BTL investors unable to access suitable mortgage products or
concerned at falling prices. Institutional investors to the sector
have been similarly affected.
45. Within the context of the credit crunch,
it is important that government takes appropriate market-led initiatives
to encourage the continued growth in the PRS and to promote further
improvements in standards, building on the successes of the last
20 years since the Housing Act 1988.
46. The Rugg review of private rented sector
housing[23]
is a decisive contribution to the discussions surrounding the
PRS. Rugg makes some key points that the CML believes should shape
government thinking as it moves to include measures relating to
the PRS in the forthcoming housing reform green paper:
— The PRS provides good levels of tenant
satisfaction, and there is no evidence that larger corporate landlords
score more highly in this regard. The sector needs both large
and small landlords.
— The emphasis in terms of regulation
should be one of effective enforcement of existing powers (notably
by local authorities) rather than on additional regulation (though
Rugg does advocate non-prescriptive licensing as a means to assist
the authorities in enforcing existing powers).
— The existing Assured Shorthold tenancy
is essentially fit for purpose.
— Government should focus on providing
tax and other incentives to both institutional and investors and
individual landlords (including BTL landlords) to further expansion
and raising of standards.
47. The CML believes that the Rugg review
provides a positive focus for future government policy for the
PRS. It is also, with its emphasis on investment, very relevant
in the context of the credit crunch. The PRS is vital to any discussion
about supply and tenure choices.
The financial viability and ongoing business of
housing associations
48. The CML welcomed the government's announcement
that a new independent regulator ("Tenant Services Authority")
would be set up with a separate housing and regeneration investment
agency, the HCA. Transitional arrangements for the set up of the
Tenant Services Authority (TSA) are progressing and the continuing
dialogue with the CML and its members is encouraging.
49. The housing association sector is experiencing
rapidly changing external conditions which have an impact on the
risk profile of the sector. Although income streams from rented
property are relatively secure there are some affordable housing
providers who are more vulnerable because of reliance on receipts
from sales to fund their development activity and in some cases
their operating costs.
50. The current risks for some housing associations
should not be underplayed, with the financial strain of unsold
properties as well as reduction in the ability of housing associations
to borrow likely to have a high impact. The HC is keeping a close
watch on the sector and the next few months will be crucial in
determining that the financial viability of the sector is maintained.
51. Action taken recently by HC to strengthen
the focus of regulation on financial viability has been welcomed
by the CML and lenders. The level of communication with the HC
around current approaches to assessing viability and risk remains
essential.
52. What still represents a significant
risk in ensuring the financial viability of the sector, however,
is how the TSA will work together with the Homes & Communities
Agency (HCA) to ensure that the separation of investment and regulation
is effective in ensuring the ongoing financial viability and sustainable
business growth of the sector in challenging times with heightened
risk.
Measures to help existing and prospective homeowners
affected by the credit crunch
53. Our latest data released in August showed
no surprises in terms of the number of mortgage arrears and possession
cases in the first half of 2008. However, while both have increased
from their low base, the vast majority of the UK's borrowers pay
their mortgages in full every month, and will continue to do so.
54. We have maintained our forecast of 45,000
total possessions, while the industry continues to strive to keep
as many people as possible in their homes. But, there is at the
same time upward pressure on our forecast of 170,000 mortgages
being three months or more in arrears by the end of the year as
a result of the worsening employment figures and broader recessionary
impacts. These numbers remain small when seen in the context of
the 11.74 million mortgages in the UK but are worrying for the
borrowers involved and need sensitive handling.
55. Our current arrears and possessions
figures relate to first mortgages only, not to other consumer
loans secured on property, and show:
— There were 18,900 possessions in
the first half of the year, compared with 13,400 in the second
half of 2007, and 12,800 in the first half of 2007. The proportion
of all mortgages on which possession occurred was 0.16%, up from
0.11% in both the first and second halves of 2007. The possession
rate now is similar to that of the late 1990s, but remains less
than half the rate experienced in the early 1990s.
— The number of households with arrears
of three months or more was 155,600 at the end of the first half
of the year, up from 129,600 at the end of 2007 and 120,800 at
the end of the first half of last year. The arrears rate stood
at 1.33% of all mortgages, up from 1.10% at the end of 2007 and
1.02% at the end of the first half of last year.
56. Lenders must, and do, see possession
as a last resort. Under FSA regulation, all CML members (first
charge mortgage lenders) are committed to comply with the mortgage
conduct of business (MCOB) rules, and the principle that possession
is only taken where all reasonable steps to avoid it have been
taken.
57. On 22 October the CML published industry
guidance on arrears and possessions. The aim of the guidance is
to give lenders a practical guide to the requirements, and examples
of good practice against which they can benchmark their own policies
and procedures. It is not a definitive statement of what lenders
should do in each case because arrears management processes will
differ between lenders depending on their business model and customer
base, and depending on borrowers' behaviour and engagement to
help themselves sustain their home ownership. The guidance is
a further step in strengthening the robustness of existing practices,
alongside the Civil Justice Council's pre-action protocol for
court cases on possession also published on 22 October.
58. Our members have committed to a package
of voluntary measures which include reviewing existing arrears
management policies against the CML's guidance, providing information
to borrowers to explain the process and implementing strategies
for assisting borrowers coming out of initial deals. We are also
continuing to work with the government, regulators and advice
agencies to ensure that as much as possible is done to help borrowers
who may be facing financial problems, and to manage arrears effectively.
59. We welcome the announcement of reforms
to income support for mortgage interest (ISMI) next spring, where
the waiting time for new claims is being cut from 39 weeks to
13 weeks, and the upper ceiling for the size of mortgage that
will be met is being raised to £175,000. For eligible borrowers,
these reforms will make it easier for lenders to exercise forbearance
until benefit payments begin.
60. In a recent Prime Minister's Question
Time, Gordon Brown indicated that the changes to ISMI would be
introduced in January 2009. We believe that, given the increased
likelihood of mortgage payment difficulties going forward, the
government should implement the proposed changes as soon as possible—and
apply them to outstanding claimants, not just new ones.
61. The two-year temporary nature of the
recently announced reform should also be revisited in the light
of the need to avoid a sudden withdrawal of benefit to claimants
and to promote stability should the economic and market downturn
prove to be more prolonged than currently predicted.
62. There also remains scope for government
to consider widening ISMI even further to make entitlement an
individual one rather than a household one since households dependent
on two incomes will see their entitlement to ISMI heavily reduced
or negated through means-testing.
63. We are also working closely with the
government on the development of its mortgage rescue scheme, also
to be launched in January, which is intended to help the most
vulnerable households that may not be able to pay off their mortgage
arrears and face homelessness. The scheme will enable borrowers
to become tenants of housing associations in the home they have
previously owned.
64. While this is welcome, it will help
only perhaps 6,000 households over two years. Once the scheme
is up and running the government could consider expanding eligibility
for the scheme to help more households. An obvious move would
be to extend the scheme to vulnerable households who find themselves
with negative equity, as is already the case in Scotland.
65. For prospective households, the government's
decision to increase the threshold for stamp duty on house purchase
from £125,000 to £175,000 means that the proportion
of borrowers who will not have to pay the tax when buying a home
has risen from around a quarter to a half. However, there are
geographical differences in the extent to which borrowers will
benefit from the governments measures, as shown in the table below.
| Already exempt % |
Cumulatively exempt % |
| Northern | 47 | 72
|
| Yorkshire and Humberside | 41
| 69 |
| North West | 40 | 68
|
| East Midlands | 34 | 66
|
| West Midlands | 34 | 65
|
| East Anglia | 16 | 51
|
| Greater London | 2 | 11
|
| South East | 6 | 27
|
| South West | 11 | 42
|
| England | 21 | 45
|
| Wales | 38 | 68
|
| Scotland | 41 | 66
|
| Northern Ireland | 8 | 40
|
| UK | 24 | 49
|
| Note: Percentage of those buying on mortgage exempt from stamp duty at £175,000 threshold, based on transaction data for the first half of 2008.
|
66. The Treasury predicted that the measure would cost
more than £600 million. But we believe it may have based
its calculations on the number of transactions in earlier years,
when sales were much higher than is now likely in 2008-09. We
estimate that the reduced number of transactions means that the
cost to the Treasury will be approaching £300 million if
the stamp duty holiday lasts for a year.
67. We would like the government to use the period of
the stamp duty holiday to consider wider reform of stamp duty
to remove the current "slab" structure and replace it
with a graduated tax that would prevent "bunching" around
the stamp duty thresholds.
68. We welcome the various government announcements of
plans to provide more help for first-time buyers which include:
— All first-time buyers with an income of less than
£60,000 will have the opportunity to apply to buy a share
of their home.
— An allocation of £200 million for the HC
to buy new properties on the open market, either for purchase
by first-time buyers through the homebuy scheme or for social
renting.
— A new Homebuy Direct shared equity product available
on selected new-build schemes.
69. Although these measures will have only a modest impact
on the housing market, they do have the potential to widen choice
for first-time buyers and Homebuy Direct does provide some protection
against negative equity for buyers encouraged to use it.
70. These announcements mean that the government is now
proposing a more logical approach to help for first-time buyers,
providing assistance based on income rather than the occupation
of buyers. The proposals will also remove the anomaly by which
one group of less well-paid workers makes access to home-ownership
more difficult for others earning similar salaries, but working
in different jobs.
71. However, we remain concerned that the variety and
complexity of low-cost home-ownership schemes dissuade both borrowers
and lenders alike from participating. In addition, the schemes
do not address the problem that accessing homeownership in some
housing market areas is much more expensive than in others and
it is not clear to what extent they will directly promote housing
supply in the present environment.
A holistic approach
72. This response sets out the CML view on CLG targets
and policy initiatives and contributes to an assessment of their
relevance and effectiveness in a post-credit crunch environment.
73. Very importantly however, it highlights the importance
of the credit crunch in causing a shortage of mortgage finance
with consequent effects on both the housing market and broader
economy. These factors are clearly interrelated.
74. The degree to which the CLG initiatives will achieve
their objectives and the extent to which government will meet
its own targets within an acceptable timescale depends very much
on the restoration of confidence within the banking system leading
to recovery of the mortgage market and a more positive outlook
for the broader economy over the medium term.
November 2008
16
Crosby J (July 2008), Mortgage finance: interim analysis,
HM Treasury. Back
17
Goodhart C, Not the time to worry about moral hazard, Financial
Times 18 September. Back
18
Standard & Poor's RatingsDirect (30 July 2008), Risk Of
Negative Equity For U.K. Mortgage Borrowers Returns. Back
19
See, for example, Anderson S et al, (February 2004), The
CML mortgage market manifesto: taking the past into the future,
CML. Back
20
Samter P (February 2008), Fuzzy households, fuzzy tenures,
CML. Back
21
DCLG February 2007, Social Mobility and Homeownership: A Risk
Assessment, New Horizons Research Programme. Back
22
Baker Tilly, Social Housing Vol 20 No 10 October 2008. Back
23
Rugg J and Rhodes D (October 2008) The Private Rented Sector:
its contribution and potential, University of York. Back
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