WHAT DOES THE SPRING BUDGET MEAN FOR THE HOUSING MARKET?

Tuesday April 25, 2023

As household budgets become tighter due to higher mortgage rates and the rising cost of living, this week’s Budget was designed to stimulate the economy and create jobs. While the Budget did not have a significant impact on the housing market, with no changes to stamp duty and only minor adjustments to capital gains tax for landlords, its focus on economic growth and employment is indirectly supportive of the housing market. This is because the health of the housing market is closely linked to the strength of the economy.

When the economy is weak and unemployment is rising, housing sales and prices tend to stagnate or fall. Conversely, a strong labour market and rising post-tax household incomes can support the housing market. However, the tax burden on mid to higher income households has been increasing, resulting in stagnant post-tax disposable incomes over the last two years.

Higher living costs and mortgage rates are also squeezing household budgets. The three-month extension to support home energy bills is a welcome announcement for many, and lenders and brokers are working with those facing higher mortgage payments to find tailored solutions. Although mortgage rates for new home buyers have fallen back to 4.5%, which is down from the 6% high seen at the end of last year, it remains more than double mortgage rates from a year ago.

As a result of weaker buying power, demand is shifting towards smaller homes that offer better value for money, and people are looking to inject more equity into their purchases. To offset higher borrowing and housing costs, it’s crucial to boost household incomes.

The housing market faces significant challenges, including affordability issues for renters and those with small deposits. Rents are rising faster than earnings growth, and the lack of rental supply and growth in the private rented sector over the last six years has exacerbated the problem. It’s crucial for the government to focus on growing housing supply by developing new homes of all tenures to ease the affordability pressures felt across the market.

Overall, while the Budget had little direct impact on the housing market, its focus on economic growth and employment is ultimately supportive of the housing market. Nonetheless, more needs to be done to address affordability issues for renters and those with small deposits.