Darling blows smoke into punctured bubble

The housing bubble burst splattering mud on the faces of the government. Blair sneaked out just in time to let Brown take the heat, though it’s as much his doing as Brown’s. Now Brown has the impossible task of looking like a good leader when he’s up to the neck in it.

So today, after Brown confirms he's sticking with the Chancellor, Alistair Darling tries to blow some smoke back into the bubble. He preps us by telling us over the weekend that we’re entering the worst economic period going back 60 years.

Darling’s puff seems rather short. The main measure, estimated to cost the Treasury £615m, is a one-year stamp duty holiday on house purchases valued between £125,000 and £175,000. The stamp duty on these properties is, in any case only 1%.

Buyers are not likely to coming flocking back to the market with such a tiny incentive, especially when mortgage providers have reduced the proportion of the property value that they're prepared to lend by much greater percentages.

Moreover, the entire housing market has burst, not just the cheap end. Properties valued over £500,000, which attract 4% stamp duty, have also stopped changing hands.

It seems, then, that this is a populist measure aimed at getting grassroots traditional Labour supporters to get behind the party. These are the people who are most likely to benefit from the shared ownership proposals whereby Housing Associations could take part ownership through partial sale-and-rent-back deals.

If, on the other hand, the government really wants to pump up the housing market, we have a big problem. The bubble needs to deflate. Never before has there been such a disconnect between earnings growth and house price inflation as has been seen in the last 10 years.

House prices have risen beyond the growth of the economy and ultimately to its detriment. The house bubble was bound to burst and the economy to implode when property values were increasing because buyers were taking on debt of greater and greater proportions to the total value of the purchase.

Demand was being stoked by gearing. Supply, meanwhile, was being choked by the vast number of government-subsidised buy-to-let deals.

Just a thought.
Lord Goring