Another terrible idea

The government is thinking of announcing some kind of stamp duty break to “kickstart” the housing market. This is addle-brained imbecility.
First, history shows that it probably won’t work. Norman Lamont offered a stamp duty holiday between December 1991 and August 1992. Although there was a surge of transactions in the summer of 92 as people tried to beat the deadline, housing turnover subsequently fell; in early 1993, transactions were 10-15% below their pre-holiday level. And prices fell not just during the holiday but in the 12 months thereafter.
So much for evidence-based policy making.
Indeed, there is, as Ross says, a danger that a stamp duty break will actually weaken the market, as prospective buyers today wait until the autumn for any announcement from Darling.
And’ let’s face it, prices aren’t falling because stamp duty is high. They’re falling because they were pushed up to daft levels by slack lending - 125% mortgages and liars’ loans - that’s now ceased.
But what’s just as bad as the policy failing is the slim possibility that it’ll succeed. If it does so, and prices stop falling, so what? We won’t, in aggregate be better off: as Willem Buiter said, housing isn’t� net wealth. Instead, what will happen is a transfer of wealth from those for whom high house prices are a liability - first-time buyers and people wanting to trade up - to those for whom they are a net asset - those looking to trade down. It’s far from clear why this transfer is a good thing.
So why is the government trying to effect it? There are several possibilities. One is that the state is no longer an umpire in this game but a player; it’s investment in Northern Rock gives it an interest in supporting the housing market.
Also, a government without guiding principles is always in danger of caving into any lobby group - in this case house builders and the mortgage industry. This danger is especially great given New Labour’s tendency to cringe in front of any industry boss.
And although New Labour is cravenly pro-business, it’s certainly not pro-market. Its instinct is that markets need regulation and intervention; in the cosmos vs. taxis distinction, New Labour is firmly on the side of taxis.
Or maybe it’s just that this government just feels the need to always be doing something. It hopes we’ll mistake activity for effectiveness.

Comments

[Mike Woodhouse]

Reading through, muttering to myself:
"No, it's not that"
"No, it's not that"
"No, it's not that"
"No, it's not that"

Then, right at the end: "It hopes we’ll mistake activity for effectiveness."

BINGO!

[James Schneider]

Mike, you are completely correct. And so far its working (in as much as its been noticed). The Sun was glowing in its report of the (not yet decided) decision.

Chris is of course correct. the policy is crap.

[dearieme]

"New Labour is cravenly pro-business, it’s certainly not pro-market": that's because it's businesses, not markets, that toss it the odd bung. Think Ecclestone.

[Andrew McG]

I certainly agree that it is not a problem that house prices are down. But transaction volume is also down, and that may be a bad thing - those who want to move are dissuaded from doing so by the illiquidity, which itself makes realistic valuations more difficult to make. If people were encouraged to buy or sell at the prices they can get today, it would not "boost the economy" in any way, but it might save quite a bit of inconvenience.

Also, with transaction volumes down so much, a modest reduction in stamp duty might be revenue-enhancing.

[William McIlhagga]

"a government without guiding principles is always in danger of caving into any lobby group - in this case house builders and the mortgage industry"

But if the policy is crap, why would house builders & mortgage lenders suggest it? I think that eliminates this possibility.

[luis_enrique]

daft policy aside, are you so sure that there are no linkages from house prices to the broader real economy? Household propensity to consume, multipliers from reduced construction activity (assuming sticky wages and prices), feedback into the availability of credit for firms, so on and so forth ...

[Bob B]

Surely, there's a straight forward option for sorting all this out?

By several reports in the news, David Miliband as PM would offer the job of Chancellor of the Exchequer to Alan Milburn.
http://blogs.guardian.co.uk/politics/2008/08/it_was_claud_cockburn_who.html

What puzzles me is that as I understood it, Alan Milburn retired from the demands and challenges of the job as SoS for health 1999-2003, citing lack of balance in his family life:
http://en.wikipedia.org/wiki/Alan_Milburn

Reassured?

[Peter Tomlinson]

The link between people moving house and spending in the economy is certainly obvious in my area - and 2 months ago the volume of house sales was down to one third of the recent peak (I dare not ask how much further it has now fallen, but then August is traditionally a quiet month, although I do hear that the volume of houses being put up for sale is rising). It is the demand that people put down a large deposit before being granted a mortgage that is screwing the market, a demand that I suspect will be maintained even if house prices fall 20%, and that may be more due to frightened bankers than to a real shortage of liquidity. Decisions such as empowering LAs and funding Housing Associations to buy new build property, albeit at lower prices that the builders are asking, are ones that this timid govt has funked - it was done in the 1970s (but then it went over the top by allowing LAs to buy single older properties all over the place - a nightmare to manage).

[Bob B]

By the press this morning, allies of Gordon Brown have been planting the smear that David Miliband as PM would offer the job of Chancellor to Alan Milburn, all of which only goes to show how much fraternal solidarity there is among ministers in our New Labour government.

[Tom]

"New Labour is cravenly pro-business, it’s certainly not pro-market"

More pertinently, the reason you can't be both is the same reason wildebeeste aren't generally pro-lion. The market, after all, partly exists to seek out and destroy bad businesses.

[Phil]

Buiter says something I'd been thinking, relevant particularly to the spectre of negative equity (which I'm sure is what's guiding government thinking on this one).

"As soon as the owner of a home that has gone up in price wants to cash in on this gain, he will find out that he will have to spend the entire sale price to purchase the right to equivalent housing services."

But conversely, when the owner of a home that has gone down in price sells it, she will find that she will have to spend *no more than* the entire sale price to purchase the right to equivalent housing services. Example:

Mortgage loan: £250K
Outstanding mortgage at time of sale: £200K

'Profit-making' scenario
Sale value of house: £300K
Profit after paying off mortgage: £100K
Loan required for equivalent house: £200K

'Negative equity' scenario
Sale value of house: £150K
Profit after paying off mortgage: -£50K
Loan required for equivalent house: £200K

The only way you'd *lose* would be if you weren't actually buying the property to live in but as an investment - and what business is it of the government to ensure that the value of people's investments keeps going up?

[Bruce]

It's a damn good idea. In this pyramid selling game we need more punters at the bottom to keep things moving. Otherwise those higher up the pyramid with expensive houses and second homes (MPs perhaps?) won't reap the rewards.

[Luis Enrique]

From The Economist's article on Buiter's idea:

"Changes in house prices shift the distribution of household wealth: they do not alter it, says Mr Buiter. Yet in his schema, there is an exception to the rule: should prices fall because of a bubble bursting, then there is a wealth effect. Landlords are worse off because they lose the bubble value—the part that did not reflect fundamentals. But tenants are no better off, because the present cost of future housing services is unchanged.

A fall in overall housing wealth might still affect spending if the housing-rich and housing-poor respond with different force to their respective fortunes. Homeowners are very likely to register the effect of their loss of wealth and to cut back on spending. The gain to renters and those wishing to trade up in the housing market is less tangible and may not affect consumer spending as much. Mr Buiter is rather sceptical about this argument. Young people saving hard for a first property or to buy a bigger home have more licence to spend freely when house prices fall, he says."

Because of the increase in mortgage rates, landlords are, I think, successfully raising rents (in London, at least) so those short housing - tenants - might not feel quite so well off.

[russ]

Not sure about this "rising rents" argument, even in London. Recent FT article (Glut forces cuts in London rentals):

http://www.ft.com/cms/s/0/b8d0ba90-6005-11dd-805e-000077b07658.html

Can't imagine real rents will go up in a recession either. Think increase 89-93 rents might have been more to do with shorthold tenancy act than magical link between falling house prices and increasing rents.