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Chancellor Darling's Panic Move on Stamp Duty Freeze to Rescue Housing Market

Housing-Market / US Housing Sep 02, 2008 - 05:28 PM GMT

By: Mike_Shedlock

Housing-Market Best Financial Markets Analysis ArticleThe Telegraph is reporting Chancellor raises stamp duty threshold to £175,000 .
Buyers of homes worth up to £175,000 will not have to pay stamp duty, Alistair Darling has announced, as he promised the country would "get through" the economic downturn.

In a surprise move to try to revive the housing market, the embattled Chancellor said that the £125,000 threshold at which buyers pay 1 per cent stamp duty will be raised from tomorrow and frozen at the new level for one year.


Announcing the freeze, Mr Darling said: "We are facing difficult times - we are in a situation where you are facing the combination of the credit crunch with high oil and food prices. We haven't seen this since the 1930s."

Some economists are concerned that the £600 million measure, funding for which Mr Darling has said will come from "new money", could heap extra pressure on the public finances at an inopportune moment. The Government borrowed £19.1 billion between April and July - £10.7 billion more than in the same period last year, and debt could spiral further amid falling tax receipts.

Howard Archer, the chief UK economist at Global Insight, said: "The public finances are taking a bit of a kicking from all directions at the moment." He added there was "no way" that the Chancellor could meet the Government's rules on borrowing, which are currently under review by the Treasury.

The stamp duty freeze - which will save buyers a maximum of £1,750 - came as the first major move in the attempted autumn relaunch by Gordon Brown, who also announced a range of measures to try and help home owners who face having their properties repossessed because of the credit crisis.

Stamp duty is currently charged at 1 per cent on properties sold for between £175,000 and £250,000, with the tax jumping to 3 per cent above this level, before rising to 4 per cent on homes worth more than £500,000.

Chancellor's Move Illadvised

The Chancellor's panic move is a huge mistake in my opinion. The reason people are not buying homes is simple. Home prices in the UK are ridiculously overpriced. Changes in tax stamp policy cannot correct that simple fact.

Anyone buying a home was going to buy one anyway. Therefore, all Darling accomplished was a reduction in public finance. This should (and did) have the effect of weakening the pound.

Furthermore, Darling's move sets up an expectation of further increases in the tax stamp limit. Why buy today if there is the possibility of additional changes in tax stamp policy coming?

Besides, who does not have a house in the UK now that wants one and can afford one?

Pound Pounded

The British Pound was pounded on the announcement.


Investor Turn Backs On UK

The pound sterling sell-off intensifies as investors turn their backs on Britain .
The pound's slump accelerated for a second day in London as traders abandoned British investments following Alistair Darling's warning that the economy is facing its worst threat for 60 years.

After dropping below the $1.80 mark for the first time in more than two years yesterday, the pound lost another cent against the greenback within the first 30 minutes of the foreign-exchange markets opening in London today and was down a further cent above $1.79. The pound was also weaker against the euro, with one euro worth 81.37p.

The dramatic sell-off comes after the Chancellor remarks about the state of the economy over the weekend. Mr Darling warned that the threats facing the world economy were "arguably the worst they've been in 60 years... and I think it's going to be more profound and long-lasting than people thought".

The warning sparked a major sell-off in the foreign exchange markets, which was compounded by fresh news that the housing market's slump is still worsening and that the wider economy is threatening to dip into recession.

The pound has fallen sharply in recent months, as investors bet on the UK economy suffering a major slowdown and that the Bank of England will at some point have to cut interest rates sharply.

Euro Busted Trendline


The monthly chart is the Euro is showing signs of cracking as well. Depending on how one draws the trendline, the Euro broke support today, but admittedly by a small amount. My belief is that both the ECB and BOE will be cutting rates. Such actions would tend to be dollar supportive and commodity bearish. And that, as opposed to manipulation, is the message behind today's drop in gold.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

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