ePolitix.com speaks to Bob Pannell, head of research at the Council of Mortgage Lenders, about their pre-Budget report

Question: What measures would the Council of Mortgage Lenders like to see in the Budget?

Bob Pannell: CML would like to see two principal measures – a clear desire to improve the safety net for borrowers, and fundamental stamp duty reform.

Question: The CML is calling for a reform of income support for mortgage lenders, what changes would you like to see happen?

Bob Pannell: The current safety net arrangements built around income support are inadequate.

We would like to see a much shorter waiting period for borrowers that face difficulties. In most cases, they have to wait nine months by which time, in many cases, the lender will have started possession proceedings or the borrower’s home may have already been lost.

The limit on income support is set at £100,000, this is the ceiling that was set way back in 1995. If linked to current house prices, the limit now would be nearly £300,000. So it has fallen very far short of what most people's mortgage costs are likely to be. We would like to see that moved upwards substantially.

A simplifying measure, introduced some time ago, means that there is now a standard rate of interest that is paid to claimers. But increasingly, borrowers face quite a wide spectrum of interest rates depending on their choice of mortgage and other criteria.

So increasingly, there will be borrowers for whom the standard rate results in a significant shortfall. It is important that income support payments actually relate to the rates charged to the borrowers.

Finally, we would like to see more support for working homeowners on low income. At the moment, tenants are eligible for much greater support than is available to homeowners. We would like to see equality of treatment between homeowners and tenants.

Question: If greater support is given to people unable to pay back their mortgage loans, is there a risk that people will borrow more money recklessly?

Bob Pannell: Theoretically, yes. But there is little, if any, past evidence of such behaviour, when income support was more generous. And mortgage regulation is there to ensure that lenders restrict how much they lend according to their ability to repay.

We are also keen to explore with the Department for Work and Pensions (DWP) ways of ensuring that better income support arrangements don't result in perverse behaviour. One idea we have, which we would like to pursue with DWP, is for income support payments to count as a second charge against the value of peoples' property.

In effect, the government gets its support refunded down the line if and when the claimant sells its home. There are many practical arrangements to work through around this, but it should assure government that we are not looking to government to underwrite profligate activity on the part of borrowers, lenders or intermediaries.

The government should be keen to discuss what arrangements could be put in place, because there is an opportunity here to deliver fairer and more generous support for homeowners, in line with that currently available to tenants, and without undue cost to the exchequer. So we see this as a win-win situation.

Question: Are repossession figures likely to increase a result of the US sub-prime mortgage crisis and the wider economic situation?

Bob Pannell: The short answer is yes, although I would like to emphasise that the UK does start from a very solid economic situation and so the effects should be on a very different scale to those seen in the US.

Also, the MPC through its actions so far to lower interest rates has already shifted market expectations of interest rates quite a lot. So there is a lot less potential for payment shock hitting borrowers than was expected six months ago.

The reality is that, because of what has happened in the US, financial firms are finding it harder and more expensive to fund their businesses. Important funding channels like mortgage-backed securities have dried up, for example, and there is a lot more competition for retail savings.

Together with a wider reassessment of credit risk, we are seeing less generous deals in the market. All of that does mean that there will be pressures, but our expectation is that they would be mostly confined to a relatively small number of sub-prime borrowers.

Question: Has the Northern Rock affair led to borrowers getting a poorer deal on mortgages?

Bob Pannell: The direct answer to your question is that we have not yet seen Northern Rock's business plan, so it is far too early to make any judgements about what effect Northern Rock will have for the wider market. But potentially, it will have some effects on the competitive landscape for savings and mortgages.

While I can understand the fascination with Northern Rock, in one sense, it is a bit of a sideshow to the main event. We shouldn't lose sight of the fact that Northern Rock problems fundamentally stem from operating an extreme business model, the essential funding for which abruptly evaporated.

Northern Rock is a manifestation of something much bigger, which is the continuing funding difficulties experienced by many firms. Those difficulties have not gone away and that is shifting the landscape for everyone, lenders and borrowers alike.

Question: What effect do you think the increase in stamp duty in recent years has had on the housing market?

Bob Pannell: We have seen something like a tenfold increase in residential stamp duty since Labour has been in office. This is a very substantial hike in the stamp duty burden and we have got more borrowers than at any time in this generation now paying stamp duty, at increasingly higher rates. Almost 80 per cent of the yield from stamp duty in the last tax year (2006/7) came from payments in the higher rate bands which Labour introduced shortly after it came back into office.

There have not been any dramatic impacts on that massive increase in tax take so far, but that is largely because the UK has enjoyed such a favourable strong economic backdrop. However, one of the remarkable features is how flat property turnover has been over the past decade.

In many cases, we suspect that the significant stamp duty liabilities, often running into tens of thousand of pounds, people moving house would incur has deterred households from moving and encouraged them to opt to improve or extend their existing homes instead.

So, no dramatic effects so far, but behaviour has been shifting beneath the surface. Looking ahead, most commentators already expect the housing market and wider economy to be quite challenging over the next six months. So we will be looking at very different market conditions.

One of the things likely to happen in a slower market is that stamp duty will be much more visible and exercise more friction, discouraging more people from moving house. In a market where there are fewer transactions, it will be harder to form chains, the market will be thin and there is the potential for greater house price volatility.

Question: The government has announced targets to build three million new homes by 2020. In your opinion, has the government failed to help first-time buyers so far?

Bob Pannell: I think the government is guilty of conflicting policies.

It is keen to expand homeownership and it sees significant opportunities for individuals from the wider asset ownership that is entailed with wider homeownership.  Its low-cost homeownership policies, in part, are directed towards that, as well as helping key workers and others into home-ownership.

But the government has not fully take on board that wider homeownership entails a much wider risk spectrum for borrowers. So there is a much greater need for effective safety nets and coping strategies on the part of households.

We are seeing an increasing percentage of first-time buyers paying stamp duty, and increasingly, paying stamp duty at higher rates. We estimate that in 2007, about 35,000 first-time buyers, about 10 per cent of the total, actually paid higher stamp duty at higher rates on their property purchases.

It seems perverse that you have a government who is promoting homeownership and sees benefit in wider homeownership. And yet young households are facing higher stamp duty rates, especially in London and the South East, where affordability pressures are already very intense.

So government is delivering very mixed messages. What we want to see is consistency across the piece; holistic measures that do not cut across each other or undermine the impact.

Question: What impact will a drop in the property turnover rate have on the market?

Bob Pannell: In the short-term, the housing market may work less well at matching buyers and sellers, and it will take longer for transactions to take place. 

If lower property turnover persists into the future, we could start to see wider affects, for example, more young families in over-crowded homes. And at the other end of the age spectrum, elderly people trapped in larger family houses, no longer suited to their needs but which they can no longer maintain because of low retirement incomes.

In short, there will be a less efficient distribution of the housing stock across households.

We could also expect to see adverse effects on labour mobility. And, as mentioned already, over-development of particular property types and in particular, areas, because of perverse incentives for people to over extend their property.

Question: What do you think should be done to reform stamp duty?

Bob Pannell: The government needs to completely review the slab structure of stamp duty. It is unlike most other tax regimes in the UK. Someone who is liable to pay stamp duty in property purchase pays it at the highest marginal rate that applies, if you are purchasing a property at £250,001 you have to pay stamp duty at three per cent, if you are purchasing at £500,001 stamp duty is four per cent on the entire transaction price. It is a very lumpy structure and it is one which promotes a huge amount of fiscal drag.

As house prices have increased over the years, increasing swathes of households have been dragged into paying higher rate bands and paying these on the whole transaction price. We favour a regime much more like the income tax structure.

But, it takes time to reform any system and so we would like to see an immediate announcement in the budget that the nil threshold, which is currently £125,000 is being lifted to £250,000.

This would have a very positive effect on stabilising and underpinning confidence in the housing market. It would signal that the government is committed to fundamental reform of stamp duty and it would benefit all first-time buyers by taking nearly all of them out of paying stamp duty at all. This would be a significant step for the government to have consistent policies with respect to homeownership.

Question: Do you have any final comments for ePolitix.com readers?

Bob Pannell: It is often forgotten that there is now a very wide spectrum of households in homeownership. We need to jettison tenure-specific policies that equate home ownership with wealth or privilege, and ensure that households facing a period of financial difficulty are helped on the basis of need, rather than their tenure.

It is also important that housing policies underpin good mobility between the different tenures and within them, because nowadays people are much more likely than in the past to experience far-reaching changes in their life circumstances. This will help us as a society to make best use of our valuable housing stock.