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What the Budget will mean for house prices

what the budget means for house prices property market uk 2022
what the budget means for house prices property market uk 2022

Britain’s property market has been flying at 1,000 miles per hour since the housing market reopened, fired up in part by Chancellor Rishi Sunak’s stamp duty tax giveaway.

Now, Mr Sunak’s Autumn Budget has come at a time of transition. The market is adjusting to the end of the stamp duty holiday. Prices have been underpinned by an extreme shortage of supply, but demand is cooling.

The Office for Budget Responsibility, the official forecaster, has predicted that the rate of house price growth will collapse to just 0.5pc by mid-2022.

Meanwhile, high inflation means interest rate rises are imminent. The Centre for Economics and Business Research, a consultancy, has forecast a 2.4pc drop in house prices by the end of 2022 to account for rate rises.

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How much could change for the housing market?

What will happen to house prices?

Back in March 2021, after the Spring Budget, the OBR forecast a short-term rise in house prices, followed by a 2pc drop in 2022.

Now, it has taken a more optimistic view than the CEBR and has cancelled its expectation of house price falls. But it still expects growth to decline rapidly, as the market readjusts following the end of the stamp duty holiday, which artificially fired up transactions.

The rate of house price growth will fall from its current rate of nearly 11pc to just 0.5pc by the middle of 2023, the OBR forecast.

This would be roughly in line with the sluggish 0.7pc growth rate recorded in October 2019, when the market was grappling with Brexit uncertainty.

A sharp slow down in the growth rate will bring the house price to earnings ratio, which is currently at the highest rate seen since before the financial crisis, back in line with the pre-pandemic level.

In turn, this will help to boost activity. The OBR expects house price growth to rise to 4pc by 2027.

Will property taxes change?

Mr Sunak fired up the housing market in July 2020 when he first announced the stamp duty holiday – and then again in his Spring Budget when he extended it. But stamp duty changes were absent from this Budget, as was to be expected.

Kay Neufeld, of the CEBR, said: “The Government needs all of the tax receipts that they can get.”

Capital gains tax, which is payable on the sales of second homes and buy-to-let properties, was a mooted target for rises. There was no movement on this either, but changes could still be in the future pipeline. “Increasing capital gains tax rates would complete the picture after the National Insurance and corporate tax rises. It is one of the only places where there is scope to raise taxes,” said Mr Neufeld.

Last summer, Mr Sunak commissioned a review of CGT via the Office for Tax Simplification, the Government’s official tax adviser. Its recommendations included bringing rates in line with income tax rates and cutting personal allowances. This could triple the number of homeowners liable for the tax.

There was one change relating to CGT, however. From October 27, the deadline to report and pay CGT on the sale of residential property was extended from 30 days after completion to 60 days. This change is applicable to both UK residents and overseas buyers.

Will cladding policy free up homes for first-time buyers?

Mr Sunak confirmed the long-announced £2bn housebuilder tax to contribute to cladding remediation. He also confirmed that this tax would be charged at 4pc on developers' profits exceeding £25m. This was at the higher end of expectations, which were between 3pc to 4pc.

But the announcement was nothing new. The housebuilder tax will simply contribute to the £5.1 billion Building Safety Fund, which has already been criticised as falling far short of true cost to fix the crisis, which MPs estimate is £15bn.

“This crisis has already been dragged on for a long time, there hasn’t been a breakthrough,” said Mr Neufeld. “The affected markets are pretty stagnant.”

For the hundreds of thousands of affected leaseholders trapped in unmortgageable, unsaleable flats, the outlook is bleak. But as the post-pandemic housing boom recedes, there is also a looming threat to the wider market.

These unsaleable properties are primarily owned by first-time buyers, said Jeremy Leaf, a north London estate agent. This means the crisis has effectively wiped out a large chunk of the first rung of the property ladder. “First-time buyers are the lifeblood of the housing market, they trade up after a couple of years and ensure that the rest of the market can operate freely,” he said.

What will happen to inflation and interest rates?

The importance of the Autumn Budget for the property market may well be entirely superseded by the Bank of England’s Monetary Policy Committee meeting on November 4, when Governor Andrew Bailey is expected to announce the first in a series of anticipated interest rate rises. This will signal the end of record low cheap borrowing, and could bring a major blow to affordability, buying power and demand.

“Lenders are already starting to withdraw super-low mortgages in anticipation,” said Mr Neufeld.

A rate rise would be a response to rising inflation. But the crucial factor is what the Bank considers to be the causes of inflation, said Mr Neufeld.

In the OBR’s central forecast, CPI inflation will peak at 4.4pc in the second quarter of 2022, driven by higher utility prices and supply bottlenecks. Under this scenario, the OBR expects the Bank Rate to rise to no higher than 0.75pc over the next six years.

But if inflation is driven either by pressures from the product market, or from increased labour market pressures, it would peak higher at 5.4pc, last for longer, and have a much bigger impact on the Bank of England’s policy response. Under this scenario, the Bank Rate would reach 3.5pc, its highest rate since November 2008, the OBR said.

This would have a dramatic impact on housing affordability. According to consultancy Capital Economics, with the Bank Rate at a record low of 0.1pc, an average person needs 38pc of the median income to cover mortgage payments on a typical home. A rise in the Bank Rate to 3pc would make these costs rise rapidly to 47.5pc.

The outlook for inflation is therefore an important indicator for the future of interest rates and subsequent mortgage costs. Several Government policies could play into this.

Mr Sunak’s previously announced plans to increase taxes via National Insurance will increase pressure for wage inflation. His new plans to raise the minimum wage and increase public sector pay will increase wages directly. A future expected rise to the fuel price cap would further increase the cost of living.

“I still think that interest rates won’t rise too high too quickly. I will be surprised if the Bank Rate is higher than 1pc by the end of next year. But markets are sensitive to small increases in rates, it will affect demand and bring everything off the boil,” said Mr Neufeld.