We know none of the detail of the Budget next week, but we can be pretty sure of two things. What Rachel Reeves unveils is likely to be bad news for your mortgage. It’s unlikely to be good news for the housing market either. There are at least three reasons why.
First and probably most importantly, unless there are sharp cuts in public spending, the Budget is unlikely to do much to cut the Government’s borrowing costs. That means that mortgage rates won’t fall much, and may even climb.
Second, any so-called mansion tax, a higher levy of some sort on more expensive homes, would have a trickle-down impact on house prices more generally.
And third, any additional taxes in the Budget are likely to dampen down economic activity, rather than boost it – which will in turn slow the housing market.
As far as mortgage rates are concerned, there are two drivers. One is bank rate, set by the Bank of England, which affects all short-term interest rates. The other is the longer-term cost of borrowing paid by the government, as shown by the yield on government bonds, or “gilts”. This is set by the financial markets.
The Bank is expected to make a one-quarter per cent cut in the bank rate, currently 4 per cent, at its meeting next month, and that will help hold down very short-term mortgage rates. But the longer the term of a mortgage, the more it is determined by gilt yields, and at the moment the UK has to pay a higher rate to borrow than any other major economy.
This premium is now around half a percentage point. The 10-year gilt yield is around 4.6 per cent, whereas the equivalent interest rate for 10-year US treasury notes is 4.1 per cent. All other major countries can borrow at an even lower rate than that. Aside from a few weeks when Liz Truss was prime minister, for most of the past decade UK borrowing costs have been similar to those of other countries – a bit higher than some, a bit lower than others. For example, three years ago the US was paying 3.7 per cent on 10-year debt while we were at 3.1 per cent. But a year ago, after Reeves’s first Budget, we started to have to pay more.
In the City this has been called the “moron premium”, an offensive way of expressing why we have to pay more than everyone else: because the markets think we don’t know how to run our finances. Reeves cannot have any impact on global bond yields, so the challenge for her will be to get the premium down. If she can’t, then all of us, not only the Government, will have to pay more to borrow.
The second influence of the Budget on the housing market will be the mansion tax. If there is indeed, as has been reported, an annual wealth levy of 1 per cent on the portion of the value of a home worth more than £2m, that will push down the price of more expensive homes. To pay an extra £10,000 a year for living in a home worth £3m might not seem material, but homeowners thinking of trading up will be aware that the rate would be likely to increase and so will be cautious. They should also expect council taxes to climb, thereby depressing the housing market further.
First-time buyers might welcome a less buoyant housing market, so there will be gainers as well as losers from a mansion tax. But it is hard to see it doing anything other than dampening down the entire market across London and the South-East, where prices are highest.
That leads to the third reason to expect the Budget to affect the housing market. Money which families have to spend on mortgages or on taxes on homes is money that can’t be spent in the shops, restaurants, and other forms of consumption. We know there will be tax rises. We have seen from the effect of the Budget last year that employers will scale back their staffing, for unemployment is up to 5 per cent from 4.3 per cent a year ago. If people lose their jobs, or fear they may, that will feed through to their confidence in buying a home or spending money improving one.
The core problem here is that no one can know in advance how any particular tax change will affect things. But we do know three things for certain. We do know that if a government is assessed by the markets to be borrowing excessively they will charge more for funding it. We know any new tax on homeownership will dampen house prices. We know that raising taxes generally depresses consumer spending. What we don’t yet know are the orders of magnitude.
So for now many potential home-buyers are holding off to see what the Budget will bring. Let’s hope the markets don’t receive Rachel Reeves’s plans too negatively, because if the Budget does go down badly everyone will be in trouble, not just our beleaguered Chancellor.
Need to know
It’s frustrating waiting for the Budget, with all the leaks and “guidance” ahead of its announcement – then the latter being spectacularly overturned, as we are not going to get an increase in the basic rate of income tax after all.
So it will be something of a relief to get the thing over next Wednesday. The core problem, noted above, is that when a new tax is imposed – and it seems overwhelmingly likely that more expensive homes will pay an additional charge – no one knows the long-term impact.
Last year, when the Chancellor put up employers’ national insurance contributions, we knew that there would be some impact both on jobs and on prices. That has indeed been the case, but we don’t know for sure the balance between the two even now.
With an entirely new tax, it is really impossible to know. You can do a mathematical exercise based on assumptions of people’s behaviour. When something new happens, for example ending the tax breaks for non-doms, the Treasury has to make an assumption about behaviour. Yet, as we are seeing now, there are both short-term impacts and longer-term ones. We are getting a feeling for the former – people leaving – but know nothing about the latter. We don’t know how many people who might have come to set up a business in the UK decide not to do so.
My best experience of this was in the early days of the devolved Welsh government. The issue was how to boost inward investment, and I was on a panel making suggestions. The question came up about planning controls, really the only lever they had. These were felt by other members of our group, who knew more about it than I did, to be overly onerous. A very senior member of the Welsh government said that he knew of only one investment project that had been abandoned because of planning difficulties.
This was a huge news story, because it was a high-profile investment by an important foreign corporation. It never seemed to occur to him that scores of other would-be investors would have read about the planning problems, not even bothered to think of investing in Wales – and built their factories somewhere else.
So let’s see how the impact of a mansion tax works out. It cannot be positive for the housing market, and it will take several years to know how negative it turns out to be. But it would be mad not to be worried.
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