U.K. Suspends Homebuyer Tax in Moves to Reverse Slump

By Gonzalo Vina

Sept. 2 (Bloomberg) -- Prime Minister Gordon Brown suspended a tax on buying some homes for the first time since 1991 and brought forward 1 billion pounds ($1.8 billion) of spending in an effort to revive the U.K. economy.

Residential properties costing less than 175,000 pounds will be exempt from stamp duty for a year under plans announced by the Treasury today. The government also will help 16,000 people struggling to meet mortgage payments and another 10,000 to buy their first home.

The pound dropped, continuing the biggest rout in 16 years, as concerns grow that a dearth of lending will tip the British economy into recession. Banks approved 33,000 mortgages in July, a quarter of the level of a year ago, after a worldwide credit crunch dried up funding for loans.

``Until more funding is available we are still some way from restoring long-term stability to the housing and mortgage markets,'' said Michael Coogan, director general of the Council of Mortgage Lenders, which represents banks making home loans. ``There are no easy solutions to some of these problems.''

Against the dollar, the U.K. currency fell as low as $1.7782, about 16 percent below last year's peak above $2.11. Britain's economy unexpectedly stagnated in the second quarter, and Bank of England Governor Mervyn King said last month that growth would be ``broadly flat'' over the next year.

``These are the things that a government should do when the economy is in a difficult decision,'' Brown said in an interview on Sky News.

Conservative Support

Brown's Labour government has trailed the Conservative opposition in polls since October and is planning a package of measures to help consumers cope with the credit crunch. The opposition said the measures don't go far enough.

``This is a short term survival plan for the prime minister, not a long term recovery plan for the economy,'' said George Osborne, a Conservative lawmaker who speaks on finance. ``Most families will not be helped and the micro measures announced.''

Chancellor of the Exchequer Alistair Darling said the measure would help half of all homebuyers. The stamp duty move effectively raises the current threshold for paying the tax from 125,000 pounds and means the buyer of a 175,000-pound home will save 1,750 pounds.

``We face a unique set of circumstances that we have not seen in a generation,'' Darling said in an interview broadcast on U.K. television channels. ``I remain optimistic that we can get through it. We will get through it.''

Housing Costs

The average house price was about 178,364 pounds in the U.K. in July, government Land Registry figures show. In London, where house prices are double the national average, 175,000 pounds would buy a studio flat in Chelsea, according to estate agent John D. Wood & Co.

``This will have no impact on the London market and provide very little assistance to U.K. house builders,'' said Robert Bartlett, chief executive officer of Chesterton estate agents. ``There are few homes built in this country for under 175,000.''

Others said the Treasury must do more to increase the funding available to home loan providers before the housing market turns around. Darling still is considering those measures and plans to make a statement later in the year.

``Until more funding is available we are still some way from restoring long-term stability to the housing and mortgage markets,'' said Michael Coogan, director general of the Council of Mortgage Lenders, which represents banks making home loans. ``There are no easy solutions to some of these problems.''

Previous Change

Conservative Chancellor of the Exchequer Norman Lamont suspended stamp duty between December 1991 and August 1992 by raising the threshold to 250,000 pounds from 30,000 pounds. The move had little effect. House prices fell about 8 percent in 1992, and home sales declined.

As finance minister, Brown raised stamp duty rates on properties above 250,000 in 1998, 1999 and 2000, leaving the lowest 1 percent rate unchanged. The threshold for paying the lowest rate doubled to 120,000 pounds in March 2005 and rose to 125,000 pounds a year later. Higher thresholds have remained unchanged since they were introduced in 1997.

Nationwide Building Society said last week that house prices declined 10.5 percent in August from a year earlier, the biggest drop since the final quarter of 1990. Banks repossessed the most homes in 12 years during the first half as the credit squeeze left more consumers unable to pay record debts.

Treasury Plan

The Treasury plans to use the 6.5 billion pounds earmarked for social-housing programs over the next three years so that more of it is used in the next 12 months. Of the 1 billion pounds announced today, 300 million pounds will fund plans where local authorities take a share of the equity of houses to help people buy their first home.

Another 200 million pounds will help those facing reposession, and 100 million pounds will go for a government program from the Department of Work and Pensions to fund loan repayments of those on government benefits. About 400 million pounds will go for building low-cost housing for the poor.

``It doesn't seem like it will produce a stampede of buyers,'' said Ed Stansfield, property economist at Capital Economics in London. ``The fear that house prices have further to fall is the dominant factor. There's not really that much the government can do or arguably should do.''

Darling said he will explain how the Treasury proposes to fund it when he announces his annual pre-budget report toward the end of the year.

Union View

``This is active government at its best,'' Brendan Barber, general secretary of the 7-million-member Trades Union Congress, said in a statement. ``It will increase the supply of social housing, help those threatened by repossession and provide a real boost to low and middle income first-time buyers.''

The revival plan lifted U.K. homebuilders in London trading. Taylor Wimpey Plc, the country's largest house builder, gained as much as 13 percent, while Persimmon Plc advanced as much as 10 percent and Barratt Developments Plc as much as 8.3 percent.

The economic slump has reduced support for Labour to the lowest since the party took office in 1997. The opposition Conservative Party, led by David Cameron, widened its lead to 22 percentage points in a YouGov Plc poll finished on Aug. 21, up from 8 points at the beginning of the year.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net