First it giveth, then it taketh away: the reality of Budget 2021

Home » First it giveth, then it taketh away: the reality of Budget 2021 Published: 10th March 2021 This Article was Written by: Harry Arnold   budget 2021 , financial outlook , inflation , interest rates

There were few surprises when the Chancellor delivered his Budget to Parliament last week, but now the dust has settled here’s what you need to know.

Many of the major announcements contained in the red briefcase had already been successfully trailed in the preceding days via the news channels. So much so, that anything other than confirmation of the details would have sent many markets (including property) into a tailspin.

Now the dust has settled, the measures (which may have appeared predictable and generous at first glance) in reality pave the way to monumental shifts in the direction of fiscal policy. This will have far-reaching consequences for both the property and employment markets, and will also have a creeping impact on middle England itself.

With the…

• furlough scheme extended until the Autumn
• stamp duty holiday extended (first until the end of June at its current level, and then tapered to £250,000 until the end of September)
• new 95% mortgages on the horizon (with no detail as to what they will look like)
• corporation tax rises grandfathered into future budgets
• the freezing of a whole host of other headline taxes – from CGT, lifetime pension allowance, inheritance tax to the big one, income tax.

…it would seem there’s been a fundamental change in Conservative orthodoxy. Let us explain further.

The dramatic effect of frozen thresholds

With many analysts (and clients) worldwide concerned about economic stimulus packages pushing up inflation (see Andy Haldane’s Inflation: a tiger by the tail speech on Feb 26th), the threshold freezes could pull millions of people into higher rate tax brackets. This measure would generate the large revenues that the Treasury believes are required to:

1. maintain market confidence in the UK as a safe issuer of treasury bonds, and
2. help to maintain our easy access to cheap money.

They’ll also have a dramatic and negative effect on people’s disposable income.

The stamp duty extension in reality

The stamp duty extension, which we welcome, only delays the inevitable rush to beat the deadline and the tapering effect means the saving on a £500,000 property drops from £15k down to £2.5k after 30 June 2021. Be mindful though that the average price of a house in the UK currently stands at £266,742, so the taper will drive a higher percentage saving in some territories but less in others – such as the South.

Will generation rent really benefit from the 95% mortgages?

The announcement that the Treasury will be underwriting the risk on 95% loans is also welcome (mainly though to banks, estate agents and existing homeowners). There is, however, a very real concern that in the mid-term we will see similar price rises comparable to when the scheme last launched in 2013. At that time, there was circa 9.4% price increases in 12 months from the scheme’s launch.

This won’t then necessarily be the good news generation rent was hoping for, given they do not have the income multiples and capacity to pay such inflated prices.

It also remains to be seen how these loans will be priced and what restrictions criteria will come with them. We are certainly concerned that many lenders (some of which are part state-owned and whom the Bank of England made clear were rock solid), still require the Government to hold their hand when it comes to mortgage lending.

Indeed, all the Government action appears to be taking place on the demand side with little airtime to the much harder problem of increasing supply.

What next for interest rates?

One area that we are regularly asked about is the future of interest rates, and we plan to cover this in more detail in a future article. But for now, while it may be that Bank of England base rate is forced to rise faster than many (including us) predict, this does not always correlate directly to new mortgage deals.

In fact, if we look at the fixed rates that have been available over the last 10 years, some of the cheapest rates were available when Bank of England base rate was at its highest – at 0.75%.

A better barometer of the price of new deals might be overall employment levels and the state of the Economy in general. We expect banks to keep a very close eye on the performance of their existing loan books. This, and their appetite for market share, will no doubt influence what rate they will choose to lend at.

Summary

Rebuilding the Economy after the pandemic was always going to mean change was afoot. Chancellor Rishi Sunak has certainly been innovative in his approach so far, but it’ll be interesting to see if the measures he’s taking will bring the outcomes he seeks. With many set to move into higher tax brackets over the coming years, it will also be interesting how traditional conservative voters stomach the approach.

At Anderson Harris, our independence and shared passion for our clients’ ambitions means we’re able to find the best lending solution for their needs. If you have plans regarding property this year, why not get in touch for a friendly chat? Call us on 020 7495 6633 or email enquiries@andersonharris.co.uk