The mini-Budget: what next for mortgages?

Tom Bill, head of UK residential research at Knight Frank

The government needs to calm financial markets as well as voters ahead of the next general election

Following Kwasi Kwarteng’s mini-Budget last month, expectations for where borrowing costs will peak rose by 150 basis points.

The question that will be concerning first-time buyers, existing homeowners and Tory MPs in marginal seats is whether the government can now reduce this number.

Kwasi Kwarteng

Cuts to energy bills, income tax and national insurance could become footnotes in Liz Truss’s economic plan, all dwarfed by higher mortgage bills.

With the government’s entire economic strategy effectively in jeopardy, something must give.

The Bank of England’s bond buying programme this week was a start. Five-year swap rates fell to 5.1% from 5.6% and the yield on a 10-year UK gilt declined to 4% from 4.4%.

However, both numbers were still more than 1 percentage point higher than they were a month ago.

What will the government do next? The reverse ferret being suggested by the IMF seems unlikely.

A few weeks ago, we said the trajectory of the economy and housing market would be shaped by how pragmatic or ideological the new government proved to be.

Based on the round of media interviews the Prime Minister gave on Thursday morning, the government will not be swayed from pursuing its low-tax growth agenda.

However, hoping that financial markets see the light before the next election feels unlikely and time-honoured plans for efficiency savings announced this week won’t convince everyone.

There are other levers the government can pull though, and more initiatives may follow the energy freeze and furlough scheme given this is an economic convulsion not entirely unrelated to the pandemic.

It’s also worth bearing in mind that the reaction in financial markets was magnified by a lack of costings and forecasts from the Office for Budget Responsibility. The Budget in late November is an opportunity to provide more economic context and fine-tune the message but it is a long way off.

Other possible initiatives include ensuring forbearance from mortgage lenders, plans to help first-time buyers further or more radical stamp duty cuts. The latter fits with the government’s vision but headlines about doubling-down on tax policy may not make easy-reading.

They may also take a longer, harder look at the role of the Bank of England and tensions with Governor Andrew Bailey may escalate as they seek the pulling of certain monetary levers.

Given the ticking clock of the next election, unless the government is planning to become a housebuilder itself, it needs to go beyond the usual vague promises about building more homes.

The recent volatility is naturally causing buyers and sellers to hesitate. The only thing that moves quickly in the UK housing market is sentiment and it’s been damaged over the last seven days.

Even if the government can start to reverse the impact of the mini-Budget, the reality of higher rates has dawned on people, wherever they end up peaking.

It therefore feels almost inevitable that prices will fall next year. While it’s true that a similar unfounded sentiment was expressed as Covid first struck in April 2020, the five-year swap rate was less than 1% back then.

Which brings me to one final thought on what happens next.

Average UK prices have risen by 23% since the start of the pandemic, so even if they declined 10% in 2023, this would take us back to where we were last summer.

We will be watching closely for further signals at the Conservative party conference next week to see how likely this scenario seems.

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