Yesterday’s announcement of the dreaded mortgage indemnity scheme should be greeted with weary derision.
All thinking members of the government know that this is a terrible idea. It puts taxpayers’ money on the line to stoke an unsustainable housing bubble at a level of financial risk that commercial lenders won’t touch with a barge pole.
But it’s not just an abuse of taxpayers. It’s also arguably immoral to tempt first-time buyers into a falling housing market, only to see their savings wiped out within months. But propping up the UK housing Ponzi scheme is a popular pastime of governments of whatever hue, unfortunately. And this latest mortgage indemnity scam isn’t the first attempt.
As one bonkers housing scheme launches another ends. On 24 March, the stamp duty holiday on homes costing less than £250,000 will finish. The looming end date seems to have engendered blind panic among some buyers, desperate to take advantage of the apparent give-away. Young buyers are sure that if they can just secure a deal they’ll win big by avoiding the duty. But unfortunately they’re chasing a mirage. Why?
Anyone who’s walked along La Rambla in Barcelona will know the ‘three cups’ game. This is the one where tricksters get unsuspecting tourists to bet on which of three cups a ball is hidden under. You’re certain that your eye has tracked the right cup as it moved around the table. So certain that you’re willing to put your own money on the line. But invariably by the time the conjuror has up-turned your chosen cup the ball is gone, through some sleight of hand, along with your money.
For conjurors read sellers, and for gullible tourists read first time buyers. As any economist will tell you, the person who’s usually required the pay a given tax isn’t necessarily the person who benefits from a tax holiday. If buyers see a stamp duty cut but sellers find that they can raise their prices by the same amount and still sell, then it’s really the sellers who benefit.
When housing supply is all but fixed, as it unfortunately is – despite whatever policy tinkering may be going on elsewhere – it’s a reasonable approximation that stamp duty simply reduces the price that sellers would otherwise be able to charge.
So if you’re rushing to buy, in pursuit of that 1% tax break, you might just find that the seller has conjured the money away in higher prices. The only difference is that most buyers will never realise they were conned. Having bought the trick, many people will then find themselves sitting on an asset that’s falling in value – a real double whammy.
It’s time politicians stopped trying to bolster house prices at the expense of long-suffering first-time buyers. Let’s hope the chancellor ignores self-interested calls to play another round of the cup game by extending the stamp duty holiday at the budget. Just like the tourists, would-be buyers would be better-off not playing.