Stamp duty: Darling ignores the elephant in the room?
By Damian Clarkson    13th March 2008

Chancellor Alistair Darling was expected to unveil two proposals in his first budget speech aimed at easing the burden on homebuyers, yet he remains silent on the one key issue that will benefit them the most.

Darling planned to outline measures to grade mortgages according to risk, so that financially prudent borrowers will be able to secure cheaper deals from lenders. He also proposed a measure to make long term fixed rate mortgages of 10 to 25 years both cheaper and more readily available to consumers.

Both these initiatives are designed to placate desperate homeowners - and first time buyers in particular - who are struggling under the yoke of sky high house prices and increased borrowing costs. And while the above initiatives may help them in the long run, he could help homebuyers instantly and far more effectively by finally addressing the stamp duty issue.

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Government the real winner of property boom
Initially introduced as a levy on higher value properties, the house price boom has meant the vast majority of households must now pay the government between 1% and 4% when buying a home. As an indication of this, 99% of FTBs in the south of England paid stamp duty, according to Halifax research.

The average FTB in the UK now pays £1,751 - nearly double (8%) that paid in 2002 - while in London the average FTB bill is an eye-watering £8,675. Clearly if the government is serious about alleviating the burden on homeowners then this is the most obvious place to start, but it remains reluctant to tamper with a tax that raked in £6.4 billion in 2006/07 alone.

It wouldn’t even need to remove stamp duty in order to help; merely raise the thresholds to compensate for house price inflation over the last decade and index it for future rises. In doing so, it would ensure that homeowners were paying pound for pound the same amount as was intended when stamp duty was first introduced, and no one could argue that isn’t fair, could they?

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Other initiatives pale into insignificance
The problem with Darling’s current proposals is that both work by lowering the cost and risk of borrowing to the banks, which must in turn pass the savings on to the consumer. So neither is likely to offer immediate relief to homebuyers, and given the massive hit the banks have taken from bad debts, its possible the savings won’t reach the consumer at all.

Even if the proposals do result in lower mortgage rates for consumers, the benefits will pale into insignificance compared to a stamp duty revision. As a practical example, if lending rates falling by, say, 0.3%, it would still take the average FTB five years before the savings matched the cost of stamp duty. In London, it would take over 16 years.

And of course stamp duty has to be paid up front, the time when homeowners’ finances are stretched the most. Finally, even if the government is successful in achieving cheaper long-term loans, it remains to be seen whether homeowners would be willing to lock into a fixed rate deal for up to 25 years.

We’re not saying either of these initiatives should be shelved - anything that benefits the cash-strapped homebuyer is welcome. Darling has clearly spent a fair amount of time thinking about how he can cut costs for this group, yet conveniently he seems to have overlooked the most obvious solution. Let’s hope this oversight is rectified in the upcoming budget.

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Article produced by EveryInvestor.co.uk