The latest survey by the Royal Institution of Chartered Surveyors suggests that residential property transactions are at their lowest level since the 1970s. This is based on asking surveyors what they think is happening, but the truth will come out in the Land Registry figures, which show the actual number of transactions. The latest figures are for February 2008, which showed sales down 35% on the previous year.

Given the almost complete absence of first-time buyers from the market, it's likely the number of transactions will continue to fall. Unless the chancellor acts, transactions could fall to under half their 2007 level.

Stamp duty is dragging the market down

Stamp duty is now exerting a powerful drag on the market, one that will simply get worse as house prices fall. Let's take the example of John Jones, who bought a home for £300,000 18 months ago and paid £9,000 to the Treasury in stamp duty. He now needs to move because of a job change.

The mortgage on his property (still worth £300,000) is £200,000. He can get a similar mortgage on the new property, which also costs £300,000. Again he will pay £9,000 in stamp duty on the purchase, and this represents a massive 9% of the equity in his home. Effectively, this is a 9% tax on moving.

A big hit to your equity

For people buying and selling below the £250,000 level, the effective tax rate will be lower because stamp duty is 1%. Bob Smith, with a £200,000 property and a £160,000 mortgage, will pay £2,000 in stamp duty to move to a property with the same value. But for him, that tax is not 1%: it represents a serious loss of 5% of his £40,000 equity.
And for those who have to sell after prices have fallen, the figures are even more dire. Say Fred has to sell his property, which cost £360,000, for £325,000. His mortgage is £200,000. So he is losing £35,000 or 18% of his original £195,000 of equity, cutting it to £160,000. Buying another £325,000 property will swallow up another 6%, or £9,750.

Two years ago most people would have happily paid a 3% tax to move when prices were rising and could add that 3% to their mortgage. Now that prices are falling people are a lot less happy about paying the tax, and even if they want to add the tax on buying their new home to their mortgage, the lender may not let them do so.

Time for the chancellor to act

The Bank of England has done what it can to free up the mortgage market. Now it is up to Chancellor Alistair Darling to do something. The best thing he can do is to suspend payment of stamp duty on all transactions under £500,000 until further notice. This won't stop prices falling, but it will help prevent the market freezing up completely by removing one big obstacle to people's willingness to move.

Sadly, I am sure the dead hand of Gordon Brown will prevent Darling from taking this radical step. Since the government botched the withdrawal of the 10% income tax rate (Gordon Brown's invention), acknowledging that high rates of stamp duty (Gordon Brown's invention) are contributing to the housing slump is likely to be a step too far for Labour's blundering leaders.