Going round the houses

THE government white paper on housing last week brought no new plans to rescue the private housing market. It concentrated almost exclusively on measures to reduce further the importance of the public rented sector and further enlarge the private rented sector.

That was no surprise. Strictly speaking, any incentives to ease the plight of over a million home owners suffering from negative equity, either by direct action targeted at them, or indirectly through a general stim- ulus to confidence in the housing market, are the prerogative of the Chancellor to tackle in the Budget.

And over the last 10 years, Chancellors have been consistent in reducing rather than increasing the tax incentives for home ownership. They have been supported by influential opinion in both the Treasury and the Bank of England, who long ago decided that a buoyant housing market is inflationary.

On Thursday, the Social Security Secretary, Peter Lilley, also dashed any hopes of an immediate U-turn on reducing support for home owners who lose their jobs through illness or redundancy. The cuts in interest payment support are still on course to take effect from October 1.

But the leadership election must have raised the hopes of those who see a recovery in the housing market as the only way to restore the feel-good factor.

If John Redwood, by any chance, wins, it is a pound to a penny that he will feel obliged to try and do something for home owners - if only because Lady Thatcher herself recently urged a return to increased support for private-sector housing, in order to rally the voters. Her populist instincts and his are similar. If anyone else wins the Tory leadership fight, however, the Government will come under increasing pressure from back-benchers to do something that will rally house prices - and thus mitigate the damaging effects of the leadership scramble on the Government's ability to unite and fight to win the next election.

It is unlikely that the present Chancellor will put tax relief on eligible mortgage interest payments back up to 25 per cent. It is even less likely that he will try to raise the tax-free allowance above pounds 30,000. But it is scarcely conceivable that any new Chancellor could go ahead with the plans that Kenneth Clarke announced last November to reduce and delay financial support for home owners who lose their jobs through illness or redundancy. It is the last of a series of measures to reduce support for house prices, and the least expensive to restore.

Patrick Moon, the economic adviser to Lloyds Bank, last week made a convincing case that although interest rates are well below their peaks in 1990-91 they have already risen perceptibly from their low of 18 months ago. Since then, the cost of housing has been rising perceptibly faster than the overall cost of living, while mortgage payments alone - after allowing for rising interest rates and reduced tax relief - have already risen by 18 per cent over the past year.

Tax relief is at its lowest level in money terms for over 20 years. Turnover in the housing market is down, house prices are still stagnant overall and, as houses account for 50 per cent of all private wealth, the housing market is now acting as a drag on the economy as a whole.

Without the deflationary impact of reductions in mortgage tax relief on the property market, Mr Moon believes prices might now be rising at 3 per cent to 5 per cent a year, instead of falling a point or two.

Conversely, the proposal to push home owners to buy mortgage protection policies costing up to pounds 30 a month will further reduce their willingness to pay actual mortgage costs by a similar amount.

Pressing ahead with the withdrawal plan still appears to be the nearest thing to electoral suicide any Conservative leader could contemplate.