It has been a number of years since it was possible to listen to the budget and understand exactly what plans the Chancellor of the Exchequer has in mind for the economy. Many of the initiatives are only described as headlines and it is necessary to wait for the small print to be released to fully assess the implications.
Another frustrating recent trend has been for Government ministers to make some announcements ahead of the budget. This is partly to soften the blow and partly to see what reaction it might provoke, allowing the chance to make some adjustments should the storm clouds appear difficult to avoid.
It is against this background that I have tried to piece together the implications for the housing sector.
Critical to many is the cost of a mortgage. This and the cost of borrowing generally was the highest risk element of what we have just heard. It had been well trailed that we would have to endure the largest tax raid for a generation to fill the “black hole” of £40 billion. Less well trailed was the announcement that government spending would increase to £72 billion. This is achieved by a sleight of hand in changing the way which national assets and liabilities are calculated.
Unfortunately the financial markets, led by international funders, are no mugs and not easily duped. Borrowing is borrowing however you try to dress it up. They have been reviewing the numbers and have reacted with increasing nervousness to what levels of debt the UK is now embarking upon. For many years we have been relying upon the “kindness of strangers” to bank role our national debt. These funders have taken on board the government’s proposals and now introduced a new level of “risk premium” for how they view the UK economy – in reality increasing the cost of borrowing. This “risk premium“ is now rated as badly as the extraordinary sequence of events in 2008 when we had a global financial crisis. This is also affecting the value of Stirling by weakening the pound.
So what does this mean for the housing market?
Many mortgage providers and banks have been much more competitive in recent weeks in respect of mortgage packages. Rates have been coming down. Lloyds Bank, who provide about 20% of all mortgages, had been predicting a 3.1% rise in house prices up from 1.2% and had reported a 17% increase in applications. This however is in strict contrast to the volume house builders who have been reporting sluggish sales for new properties. This is confusing for those who either have been struggling to sell or for the all important sector of first time buyers. For months there has been pressure on house prices in the expectation that interest rates would decline. This has been slow to materialise. The effect of this has been that many prospective purchasers have adopted a wait-and-see approach. The average time it is taking for a seller to find a buyer has jumped from 45 days a year ago to 66 days in October. Volume sales have declined by annual 17% to 90,920 and were 2% lower than in September.
To make this even more confusing there have been some improvements with some mortgage rates falling steadily since July. The average two year fixed rate now at 5.52% down from 5.77% a year ago and the average rate for five year fixed mortgage at 5.17% down from 5.52% this time last year.
Not withstanding this, affordability remains stretched for many purchasers. Overall this means that the level of sales being agreed is 10% lower than in 2019.
The budget has certainly put a spanner in the works in respect of the trend in interest rates. Whatever happens to Bank of England interest rates (which are heading down), there is no certainty that mortgage providers will reflect this change in the level of mortgage interest rates that they charge. For them, risk about the success of the general economy and real money market interest rates is far more important than base rate. This is disappointing news in what has been a disappointing market for both Buyers and Sellers.
The second area of change which was referred to in the budget (but had previously been trailed) is the need for us to build far more houses. The target has been set to build 1.5 million over the next five years. This exceeds even the most ambitious forecasts of those who are experts in understanding this highly complex market. Levels of housebuilding at this rate have never been delivered and it would be a miracle if even half of this total could be achieved.
In order to stimulate this process, the government has undertaken to change the planning system which is beyond dysfunctional. When we talk about the NHS being broken, then look no further than the planning system to see an even worse example. Currently housing development, factories/warehouses, laboratories, critical infrastructure even electricity grid connections, representing billions and billions of value, are stuck or stalled. These are investments proposed by the private sector which just cannot progress through the system for a multiple of reasons. The government have promised to reform this “root and branch”. Many in industry would support the principle of the approach being adopted, but will rhetoric convert into action? Many are cynical and say that it will not be possible to turn around this “super tanker” any time soon, leaving us stranded with appalling levels of investment in our building industries and critically in the supply of much needed new housing. We are quite simply failing our next generation to provide them with a decent roof over the heads.
The only actual housing related changes within the budget statement were to Stamp Duty and Inheritance Tax.
It was confirmed that the government will not be extending the higher threshold at which people start paying property tax. The previous government increased the new rate threshold from £125,000 to £250,000 and, for first-time buyers, it rose from £300,000 to £450,000. This allowance will end in March and means that there will be a significant increase in the cost for Buyers. It is estimated that 9 out of 10 purchases in England will be subject to stamp duty up from less than six in 10. The number of first time buyers paying stamp duty will rise from 8% to 26% when this threshold kicks in.
A significant change was also made which will affect the critical rental sector as a result changes of stamp duty on second homes, including buy-to-let properties. The new rates mean an increase, from the current level of 3%, to 5%. The average landlord, when buying a property, will incur an additional £7000 in stamp duty This comes at a time when there is already huge pressure on the rental housing market. Tenants have faced record rent increases in recent years. This has been partly blamed on high mortgage rates and previous tax changes made by Government, making these less attractive investments. The government has tried to justify this by saying that it will make the market more competitive by reducing demand from second home buyers and investors thereby making it easier for First Time buyers to enter the market. This is an extremely high risk move and is unlikely to change the level of activity to anything like the assessment of an additional 130,000 extra transactions over the next five years for First-Time buyers.
My assessment of all this is that the budget is a huge gamble. It is impossible to predict the outcome but it will rely on many external factors, including public sentiment, foreign investors and a huge slice of good luck.
