The 1.5% base rate cut won’t make a difference

An aggressive statement I know and one I suspect some people will tell me I am mad to claim. I am only relating this to consumers however not too business where the impact on lending that is more often linked to base rates and the potential benefits to exports of lower exchange rates may produce some positive results. But my own current experience of remortgaging has got me thinking about the effect on Joe Public.

Leaving aside the debate about whether stimulating demand through cheaper debt is really the best thing for the economy in the long run or merely trying to recreate a bubble that has already burst, consider the following:

The average age of first time buyers reached 34 in 2006 having risen from 27 over the preceeding 30 years. So lets assume that the average age as a first time buyer of people who still have mortgages outstanding was 30.

Assume the average term of a mortgage is 25 years and therefore people finish paying it on average around the age of 55.

The average price of a house has apparently fallen by 15% over the past year and is therefore back to the levels it was at in 2006.

Tracker rate mortgages that would benefit from the reduction are only held by a small minority of people as fixed rates have been in vogue and the new deals being offered are either at hefty margins that pretty much wipe out the benefit of the reduction or require LTV levels of less than 60%.

Implication 1 – the majority of people under the age of 45 will be unable to benefit from the reduction either because they are already locked into a fixed rate or can’t switch to a competitive tracker even where one is available because their LTV is likely to be assessed at more than 60% through a combination of being too early in their mortgage term and/or their house price has fallen.

Implication 2 – If you are over 50 your mortgage is likely to be low as you come to the end of your term so even though you qualify for the sub 60% LTV the reduction in your outgoings will be relatively small in absolute terms. Meanwhile your investments including your pension fund which are now much more important to you than debt prices, as you near the end of your working life, have fallen in income terms – due to the very same base rate cut – and asset value terms due to the fall in the stock market.


The people who could benefit from a reduction in interest rates in their pockets and so potentially stimulate demand i.e. under 45s, won’t because for various reasons they can’t get a hold of the cheap money and the ones who can get a hold of the cheap money i.e the over 50’s have lost far more on their investments than they will gain in reduction in debt cost so are also unlikely to start spending more either.

So its all down to everyone between 46-49 to bail us out :-) A simplistic analysis I accept but one with more than a grain of truth?

A £600m stamp and it’s still second class

Today’s announcement that the stamp duty threshold has been increased to £175,000 for the next year raises some interesting questions. Was it a coincidence that this announcement came on the same day as the OECD announced the UK would go into recession in the second half of the year? Let’s be generous and say that it was. However the wonders of the stamp duty system leads to this creating some interesting numerical anomalies. The stamp duty bands will now be as follows if I understand correctly:

0% – up to £175,000
1% – £175,001 – £250,000
3% – £250,001 – £500,000
4% – £500,001+

This means that if I buy a property for £175,000 I pay no stamp duty. But if I buy a property for £250,001 I pay£7,500 in stamp duty. This means I have to pay £7,500 more to buy a property that is £75,000 more expensive i.e. 10% of the extra cost of this property. Pressure had already existed on sellers just above the £250,000 level to reduced their price with the previous increases of the exemption in the last three years to £120,000 and then £125,000, but this change just made that pressure even greater.

The change may benefit housebuilders of properties between £125,000 and £175,000 as effectively the taxpayer has just subsidised the sale of those houses in that price bracket by 1% of their value, but it probably won’t help chains greatly due to the presence of the same substantial level of stamp duty on properties greater than £250,000.

The estimate of £600m also only represents less than 10% of the tax receipts from residential sales – a relative drop in the ocean. Delving further highlights the Treasury’s reliance on the tax generated from the higher bands. In 2006-7 (the last year I can find this analysis for) the stamp duty generated on sales of properties above £250,000 was £5.07bn of a total of £6.45bn, nearly 80% of the receipts. This compares with only £1.64bn of a total of £2.69bn in 2001-2, approx 60% of receipts.

This means that of the £3.7bn of additional receipts in 2006-7, £3.4bn came from the higher bands.

Conclusion – today’s announcement is all about trying to create a perception of action, when in reality the Government has become so reliant on this income stream that it can’t afford to reduce the amount it receives by very much so it looks for the way that will create the biggest headline for the smallest cost.