The big issues from the controversial mini-budget
Kwasi Kwarteng’s mini-budget has provoked a huge reaction among many. What really concerns us, however, is the impact on the property sector. Are the forecasts of doom and gloom real? We break down the mini-budget's effect on the property sector in this post.
Never in the course of human history has something advertised as ‘mini’ provoked such a huge reaction. We’re referring, of course, to chancellor Kwasi Kwarteng’s mini-budget - a ‘quasi-budget’ if you like - which soon put paid to Liz Truss’s plans for a quiet week after the pomp and circumstance of the Queen’s funeral.
To say that the mini-budget received a mixed reaction would be an understatement. After all, the new PM and chancellor announced the biggest tax cuts since the early 1970s. As the financial markets plummeted and the pound nose-dived in response, you could hear the gnashing of teeth in Westminster as far away as John O’Groats. Even the IMF stuck its oar in.
What really concerns us, however, is the mini-budget’s impact on the property sector. And thus far, if one listens to the news, the ramifications are going to be somewhere between terrible and apocalyptic. But should we actually take any notice of these forecasts of doom? After all, the media don’t ‘arf love a bit of sensationalism.
Stamp duty
The first news that impacted the sector was the stamp duty changes: the chancellor raised the threshold at which SDLT must be paid from £125,000 to £250,000. He also raised the threshold for first-time buyers, who receive extra help from the treasury, from £300,000 to £425,000 (with a discount on properties costing up to £625,000).
Will these measures help the property sector by making it more affordable to buy a home? Yes siree Bob. After all, buyers will undoubtedly save a few bob: £2,500 on the average UK purchase price of £312,000 to be exact. First-time buyers will save even more: £11,250 on a house costing £543,500 (which is the average price in London).
Those looking to get on the property ladder were therefore the mini-budget’s big winners. However, they probably shouldn’t get too carried away. JMI ambassador Mark Hayward has warned that, “whilst raising the SDTL thresholds will help, it’s possible that house-builders and sellers will merely build these savings into asking prices”. Once again, the economic gods giveth with one hand but take away with the other.
Talking of which…
Interest rate rises
As the pound crashed and the government’s ability to control the narrative car-crashed, the Bank of England scuppered the chancellor’s plan to make moving more affordable by bracing the country for interest rate rises. And this was after they’d already raised interest rates to 2.25% the day before the mini-budget.
As a result, rises in the cost of borrowing are likely to wipe out whatever homeowners might have saved on stamp duty. Did you know that a rise of just 0.5% costs the average mortgage-payer £1,512 a year? And the bad news, of course, is that interest rates are expected to climb even higher. Indeed, many economists are predicting that interest rates could almost treble to 5.8% by next summer.
It’s hard to overstate how severely this will exacerbate the cost of living crisis for mortgage holders: it could see their yearly repayments increase by several thousand pounds. After all, even the rises we’ve seen in the last year alone have led to increases of £3,000-4,000 for an average £250,000 mortgage.
Although some analysts have pointed out that interest rates were as high as 15% back in 1990 - as if homeowners should be grateful - this was a long time ago. House prices were lower back then so mortgage debts (and monthly repayments) were smaller. Today’s mortgaged-up-to-their-eyeballs homeowners, on the other hand, will really struggle to keep their heads above water. Would-be buyers are also likely to get spooked. And Halloween's still a month away.
Mortgage companies running for cover
Mortgage holders aren’t the only ones getting the heebie-jeebies, of course; lenders themselves are currently hiding behind the sofa. Virgin Money and Skipton were the first to act when they temporarily withdrew mortgage deals for new customers at the start of the week. Halifax soon followed suit by withdrawing products that offered a lower interest rate in exchange for an upfront fee. Meanwhile, Santander and Nationwide have since joined the pulling-out party: the former removed its 60% and 80% loan-to-value products from the market while the latter ramped up its prices for fixed-rate products.
The obvious problem for lenders is that it’s harder than the Financial Times crossword to accurately price their products at the current time. Inflation is soaring and nobody can predict how high interest rates might climb. Therefore, they’d rather leave the dance-floor and watch from the sidelines until the immediate outlook becomes more certain.
So what does it all mean?
Let’s be honest. Rising interest rates aren’t great news for the sector. Borrowing will be more expensive, potential buyers could fail affordability checks, and many mortgage holders won’t be able to afford their repayments (and may find it difficult to switch providers, too). Meanwhile, first-time buyers might pause for thought before taking their first step on the property ladder. Many buy-to-let landlords are also likely to pass their rising mortgage costs onto tenants, which will push rents even higher than they are now.
However, are things really as desperate as the media are reporting? Let’s not forget that columnists have been predicting an imminent property crash for months. Instead, we’ve seen a gentle cooling, but prices generally continue to rise: according to Rightmove, the average price of a home coming to market increased by £2,587 (a rise of 0.7%) month-on-month to September despite incremental increases in interest rates.
We should also mention that the new stamp duty breaks could push prices higher. After all, the dominant characteristic of the current market - the general lack of stock - hasn’t changed and may not do so for some time. It’s easy to get sucked into the negative headlines but buying a home remains an excellent long-term investment.
In the words of Mark Hayward, who’s seen his fair share of peaks and troughs during his career at Propertymark, “the interest rate rises may seem daunting, but buyers must remember the significant house price inflation and increased equity they have enjoyed in recent years”. In other words, mortgage repayments might go up but buyers will still win in the end.
Words of comfort
As property professionals, we should do our best to reassure clients that things are rarely as bad as the media make out. Yes, it’s only natural for buyers to be concerned, but if they shop around for the best mortgage deals then they’ll have more wiggle room if their provider does pass on base rate increases. Meanwhile, if they choose a fixed-rate mortgage, remind them that they’ll need to budget for repayment increases when their fixed term ends.
Overall, it’s important to fight back against the doomsters. The property market is driven by sentiment so, in Mark’s words, “let’s not fall foul of the self-fulfilling prophecy” by talking ourselves into a crash. While there’s a shortage of properties on the market, and not enough homes are being built, the basic economics of supply and demand should prevent a cataclysmic crash of calamitous proportions.
Don’t forget that the sector has survived a lot in recent times. If we can weather the uncertainty of Brexit, not to mention the wrath of a global pandemic, then this week’s economic crisis could turn out to be nothing more than a mini-problem.