The mini-budget announced in September had a host of changes that would affect the housing market.
Before the mini-budget, mortgage rates were expected to rise to around 4-5% between now and the New Year, and this, along with the rise in the cost of living, could mean that demand for homes will start to cool.
However, after the announcement from Chancellor Kwasi Kwatrteng, interest rates were predicted to rise to around 6-7%, which represents a 25-30% fall in home buying power for those looking to buy a mortgaged home.
In the budget, the Chancellor announced that stamp duty would not be charged on the first £250,000 of a property purchase for people moving home, up from the current level of £125,000. In addition, to help people purchase their first home, no stamp duty would be paid on the first £425,000 of a property worth up to £625,000 bought by first-time buyers. This tax cut only applied to properties in England and Northern Ireland. However, Wales has since brought in similar measures whilst we still wait to see if Scotland will follow suit.
Since Jeremy Hunt was brought in as Chancellor to replace Kwasi Kwatrteng, many of the previous tax cuts have been axed, but how does this affect the UK housing market?
So, what’s changed and what’s staying the same?
- The basic rate of income tax will no longer be cut from 20% to 19%
- The energy price guarantee will still be implemented, but instead of lasting for two years, it will be reviewed again in April 2023
- The one-year freeze on duty-free shopping for tourists has been scrapped
- The one-year freeze on alcohol duty has been scrapped
- The cut to the dividend tax rate has been scrapped
- The 45p tax rate has been abolished – this change remains
- The corporation tax rise to 25% remains
- The stamp duty tax cut in England, Wales and Northern Ireland remains
- The reduction to National Insurance contributions will remain
How have the financial markets reacted to the budget reversal?
The reaction from the financial markets was positive; the pound strengthened against the US dollar after it fell to its lowest-ever value straight after the mini-budget announcement, and gilt yields fell to their lowest level for ten days.
In terms of the cost of living, the end of the energy price guarantee in April 2023 rather than October 2024 means that we all face a rise in our energy bill sooner than anticipated. However, the government may review the help available in the spring.
The housing market
Although the gilt yields don’t affect the general public directly, it does affect swap rates which is the interest rate that lenders are subject to when borrowing money for fixed-rate mortgages. Therefore, it was the rise in gilt yields which caused the withdrawal and reprice of mortgages from many lenders.
Now that gilt yields have fallen again, fixed-rate mortgages should stabilise or even fall. Although this will make lenders feel more confident in pricing their mortgage deals, the energy price guarantee will end earlier, which means that inflation could stay higher for longer. This, in turn, means that interest rates could keep rising as the Bank of England tries to bring this down.
Higher taxes, rising costs and higher mortgage rates could cause a slowdown in the property market. However, after two years of unprecedented growth, this would be a price correction, typical after house prices have risen quickly.
Households today have less debt than they did during the last housing market price correction. There is still an imbalance between supply and demand which underpins house prices, so it is not anticipated that repossessions will rise significantly.