What does the Spring Budget mean for the housing market?

This week’s Budget had little direct impact on the housing market. Stamp duty is unchanged and there are no big changes for landlords, other than a lower level of tax free gains before paying capital gains tax.

The Chancellor has focused the Budget on stimulating the economy and jobs, encouraging as many people as possible to keep working and help fill the UK’s 1m job vacancies.

Focusing on economic growth and jobs ultimately supports the housing market as the health of the housing market is directly linked to the health of the economy.

Housing sales and prices tend to stagnate and fall when the economy is doing badly and unemployment is rising, while the opposite is true when the labour market is strong and post-tax household incomes are rising.

The tax burden has been rising for those on mid to higher incomes, meaning there has been no growth in post tax disposable incomes over the last 2 years.

Household budgets are also being squeezed by higher living costs and many will welcome the Budget announcement of a 3 month extension to the support for home energy bills.

Higher mortgage rates have added further pressure for new home buyers and those remortgaging. It’s welcome news that a very high proportion of those with mortgages are on 5-year fixed rate deals but as they come off these deals the increased monthly payments will hit monthly budgets.

Lenders and brokers are working with those who face material increases in mortgage payments to come up with tailored solutions to ease the pressure.

Mortgage rates have fallen back to 4.5% for new home buyers. This is well down on the 6% high’s seen at the end of last year but remains more than double mortgage rates a year ago.

The housing market can withstand higher mortgage rates and we have consistently argued that sub-5% mortgage rates would not lead to big price falls and this is bearing out.

However, new buyers have 20% less buying power than a year ago. This doesn’t mean prices will fall by this much, but people will look to buy smaller homes or move to areas that offer better value for money. Others may look to inject more equity into home purchases where funds are available.

Overall, the best way to offset higher borrowing costs – and housing costs in general including rents – is to help boost household incomes, which no-one would argue against.

As a result of weaker buying power, we have seen a gentle shift in demand towards flats as the early home buyers of 2023 sought better value for money.

We expect mortgage rates to stay in the 4-5% range over 2023, so those who would like to move should not expect rates to move much lower and plan accordingly.

The big challenge in the housing market is affordability, especially for those who rent or have small deposits to put towards a home. Rents are rising fast, up 11%, which is well ahead of earnings growth, which is currently  6.7%.

Many younger households looking to buy and renters of all ages are concerned about the lack of supply and scale of recent rent increases. This is all a result of low rental supply and a lack of growth in the size of the private rented sector over the last  6 years.

As well as focusing on jobs and growth, it’s important that the government continues to focus on growing housing supply through the development of new homes of all tenures. Only by improving supply can we ease the affordability pressures felt across the market.