Efforts to avoid a huge increase in the number of repossessions took centre stage in the Queen’s Speech debate. Gordon Brown unveiled his scheme to guarantee the mortgage interest payments of people who lose all or part of their income. The scheme will apply to mortgages up to £400,000 and all the main lenders have signed up.

It followed last week’s announcement by the Royal Bank of Scotland – now majority-owned by the taxpayer – which was first out of the blocks with a commitment not to start repossession proceedings until borrowers are six months in arrears. This prompted plenty of headlines and sniffy reactions from other lenders, who insisted this was merely putting in black and white what they do anyway. The Council of Mortgage Lenders says that its members are not trigger-happy on repossessions, not least because it is rarely in the lender’s interest to be so.

So, will all this help or hinder the housing market? Allowing people to stay in their homes sounds like motherhood and apple pie, which is why politicians have welcomed the RBS announcement and acted themselves. If homeowners are genuinely temporary difficulties, it’s not in anyone’s interest to turf them out onto the street.

That said, there are potential disadvantages. One is what Mervyn King, governor of the Bank of England, would call “moral hazard”. Is it fair that those who overborrowed are treated gently, while sensible borrowers dutifully keep up payments? There is also a danger of gesture politics. Most lenders use sophisticated models to assess whether borrowers are a lost cause. Some are clearly heading for default after two months in arrears; others may be on reduced payments for a year, then recover.

The big question, though, is whether a soft touch on repossessions prevents a necessary adjustment in house prices. The answer, I think, is no. Repossessed properties may provide beleaguered estate agents with a bit of business and “vulture” buyers with auction bargains, but they make up a small fraction even of a depressed market. If 45,000 of them reach the market this year, that will be equivalent to sales in just one month, August, which were 63% lower than a year earlier. Repossessions would have to increase hugely to become the tail that wags the housing-market dog.

home.economics@sunday-times.co.uk

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