What’s really putting the brakes on the housing market?

I am engaged in a never-ending struggle with my inbox. I get around 200 emails a day. Staying on top of them is like clearing the Augean stables. Despite my enthusiastic use of the “delete” key, I still have close to 2,000 unread messages.

Of those, more than 200 contain the term “house prices”. I have never been a property correspondent and I stopped editing the FT’s Money section more than two years ago. Yet still the press releases flood in. They fall into two broad categories. The first is the plain daft: how prices compare along the route of the Boat Race, or how much a new Waitrose adds to the value of your home. The second is the running commentary about the various house price indices that are released each month.

The most obvious comment to make about these indices is that they are all statistically flawed. Some measure only sentiment, not actual transaction prices. Some measure only property bought with a mortgage from a particular lender. There are geographic biases. And they all suffer from the fact that every property is different; it is not an asset class that lends itself to indexation.

But nobody ever says that. Instead, there are various explanations as to why prices are either not going up, or not going up as fast as before, or going up more in some places than others. Lately, there has been a drop in transaction volumes to explain, too. Most of the theorising does not add up.

Take the number one culprit: “uncertainty” over Brexit, the general election or both. Intuitively, one would think there might be something in this. Houses are just about the biggest-ticket purchase most people ever make. You wouldn’t want to buy one just as the market turned south.

But more people voted for Brexit than not, so I cannot see why they would regard it as a reason not to move house. And for every know-it-all trying to time the market to perfection, there is a couple with a new baby on the way who need to trade up. Or a bereaved family with a big inheritance tax liability that needs to sell. Or, most likely of all, there is someone living in a tatty flat in an undesirable part of town, handing over half their salary to a landlord each month. I doubt the status of the Brexit negotiations or the soap opera in Westminster are at the top of their minds. And according to the big housebuilders, the referendum and the general election has had little impact on their activity.

Not far behind in the blame stakes are stamp duty changes. In the autumn statement in 2014, George Osborne switched the “slab” system of stamp duty to something slightly more progressive, with graduated bands. Now, stamp duty is still an awful tax. It penalises those trying to get on the ladder rather than those who have already made large profits. But the changes in 2014 meant that (all other things being equal) 98 per cent of people paid less. Only those buying homes valued at £974,000 or more were worse off. Outside the capital, this is a tiny subset of property sold in the UK.

More credible is the charge that increasingly onerous taxation of buy-to-let property has reduced transactions and curbed price growth. Mortgage lending to landlords has fallen. Economic theory expects higher taxes, such as the surcharge now levied on purchases of second homes and investment properties, to be reflected in lower asking prices. The ability to offset mortgage interest payments and maintenance costs against taxable profits is also being restricted. If those profits are lower, then purchase prices also need to be lower for returns to remain the same.

On the other hand, serious landlords who are well organised can structure their affairs to minimise the impact of these levies. Mortgage rates have continued to fall since the changes were announced, while overseas investors get the benefit of a weaker pound.

Most pundits think slower price growth will be a temporary problem. The market is “taking a breather”. Their confidence is reinforced by the “chronic shortage of homes for sale”. Except that there is not a shortage of homes for sale. Over half of homes on agents’ books never sell, more in some areas. What happens to the rest? They either stay on the market, or are quietly withdrawn from sale.

There is an alternative explanation for each of the factors above. It is that prices are simply too high in some areas of the country. When prices rise faster than rents, buy-to-let yields are pushed down. This was happening long before George Osborne started fiddling with taxation. Compressed yields mean lower returns and more risk.

The housing market in some parts of the country is in a Mexican stand-off between buyers and sellers that will end when one side or the other capitulates

Rising prices also mean more stamp duty, even allowing for the changes to the system. In places where prices have seen the steepest rises, they may have wiped out any benefit from the change to the system. Bear in mind that many other costs of moving, such as estate agent commissions, are percentage-based, adding to the costs of purchase.

High prices also limit transactions. First-time buyers have had it tough for a long time, but even “second steppers” now find the market running away from them. Imagine a flat costing £200,000 and a house costing £300,000. You buy the flat. Over the next few years, prices rise 50 per cent. Your flat sells for £300,000, but the house now costs £450,000. Trading up costs £50,000 more in absolute terms than it used to — real cash that has to be saved or borrowed.

Unrealistic asking prices are why property remains stuck on agents’ books. Look in London’s three inner zones — supposedly the epicentre of the nation’s housing crisis — and it is not hard to find properties that have been on the market for a year or more.

How does all this square with the housebuilders’ exuberance? The simple explanation is the government’s Help to Buy scheme, which accounts for up to half of their sales. It effectively gives people free money for five years to help them purchase, but it limits their equity gains when they come to move. The first Help to Buy loans extended will become interest-bearing later this year, too.

So there you have it. The housing market in some parts of the country is in a Mexican stand-off between buyers and sellers that will end when one side or the other capitulates. I’m glad I only have to worry about my inbox.

Jonathan Eley is deputy editor of the FT’s Lex column. jonathan.eley@ft.com. Twitter: @JonathanEley

This article has been amended since publication to remove house price figures which should not have been used as a basis for comparison.