House prices have fallen by more than 10 per cent in the past 12 months and show no sign of reaching a plateau. The Royal Institute of Chartered Surveyors reports that home sales are at their lowest level for 30 years. Against this background, the Government is trying to help those caught up in the housing market ructions (see opposite page).

The threshold for paying stamp duty on house purchases has been raised from £125,000 to £175,000 for 12 months. Other measures include help for homeowners who are in danger of having their homes repossessed, and a shared equity scheme to help first-time buyers to enter the housing market.

The Government plainly hopes to stimulate the housing market, alleviate distress on the part of extended borrowers, and help to restore its own political fortunes. None of these aims is likely to be realised by its rescue package. The measures are worse than wrong answers to an economic problem: they are answers to the wrong questions.

Intervening to stabilise the housing market is fundamentally misconceived. Trying to mitigate the consequences of irresponsible lending decisions carries its own costs. The combination of these approaches signals a retreat from what used to be counted the main achievement of new Labour’s economic management. Instead of adhering to a framework of rules, the Government is now engaged in piecemeal discretionary intervention and an appeal to sectional interests.

Surveying the battered state of the housing market is, in the phrase of Yogi Berra, like déjà vu all over again. In the housing boom of the late 1980s, consumers built up debt that left them – and the lending institutions – acutely vulnerable to the credit cycle. The severity of the downturn in the early 1990s was thereby aggravated. Output fell and house prices collapsed. Yet, owing to an inflation problem in Germany and sterling’s membership of the European Exchange Rate Mechanism, it was not possible to provide relief by reducing interest rates.

The constraint on monetary policy now is high and rising inflation, and Britain is not yet in recession. But the prospects for the economy and the housing market are ominously reminiscent of the problems of the early 1990s. Then, the Conservative Government responded with – of all things – a stamp duty holiday on house purchases. At best, this was an inconsequential palliative, but it also magnified volatility in the housing market. Transactions increased as the end of the holiday approached; they then fell back once the old threshold for stamp duty was reimposed. Presumably buyers were merely altering the timing of their purchases in order to beat the deadline. The same is likely to happen next year as the stamp duty holiday draws to an end.

There are also more tangible costs to the Government’s measures. The package, costed at £1.6 billion, will add to pressures on public borrowing. While there is a natural sympathy for homeowners who face repossession, there is also a moral hazard in signalling that taxpayers will bail out distressed borrowers once house prices cease to be a one-way bet. The benefits of the housing boom were not universally shared: they were enjoyed by those who took out high mortgages with low deposits. It is inequitable if the costs of those decisions are now widely distributed.

But the most fundamental objection to the housing package is that government has no legitimate function in targeting asset prices. The most direct way to assist first-time buyers is to allow an overvalued market to find its own equilibrium. There is no reason for the Government to seek political salvation by populist appeals to the economic interest of existing homeowners.