Financial markets had their ears peeled for this Autumn statement. After the mini-budget unsettled markets just under two months ago, we saw a spike in borrowing costs for consumers and the government alike. While most borrowing costs have come back down, the fact remains that there’s still a large £60bn sized hole for the new PM and Chancellor to shore up.
Since the latest Bank of England (BoE) meeting where interest rates were raised to 3% and their predictions of a recession were reinforced, inflation has crept up further. Data out this week showed that CPI hit 11.1% in October, the highest level since 1982.
Many of the announcements today from the Budget are aimed at addressing the two main challenges facing the country; the cost of living crisis caused by rampant inflation and the threat of a contraction in economic growth – the former exacerbating the latter. It’ll take some careful balancing to tackle both these issues at the same time and the government has chosen to use both its levers; tax increases and spending cuts with almost equal weighting.
The key Autumn Statement announcements included:
Taxes
- The thresholds at which earners start paying income tax and national Insurance have been frozen until April 2028.
- The threshold at which the 45% income tax rate is levied has been lowered from £150,000 to £125,140. While this change will only affect the top 2% of earners, it will result in an annual tax increase of £1,240 for anyone earning above the previous threshold.
- The proposed corporation tax increases remain on course to come in as expected in April 2023, with rates rising from a flat 19% to 25% on profits over £250,000.
- Stamp Duty Land Tax (SDLT): The increase in the stamp duty threshold from £125,000 to £250,000 will likely be reversed from April 2025, however there were limited details of how this process will take place and what will replace it.
- Council Tax: There was mention of “increased council tax flexibilities” and it is expected that councils will be given the ability to raise rates by 4.99%, without a referendum (up from 2.99% currently).
- Capital Gains Tax:
- The previous annual tax-free allowance of £12,300 will be lowered to £6,000 in April 2023 followed by a further cut to £3,000 in April 2024. The average landlord who sold this year in England & Wales sold their buy-to-let for £98,050 more than they paid for it. After deducting 10% for costs, this would leave the average lower-rate taxpayer with a £13,670 CGT bill, or £21,260 for higher-rate taxpayers.
- When the threshold is reduced next year, it will cost the average landlord £1,130 or £1,770 for lower or higher-rate taxpayers respectively. The following year an average higher-rate landlord would expect to pay 12% more or £2,610 in CGT when selling.
- The dividend allowance is also set to be reduced from £2,000 to £1,000 in April 2023 and £500 from April 2024.
Spending
- Pensions, benefits and the living wage will all be uprated in line with inflation next April, based on September’s figure of 10.1%.
- The energy support package will continue beyond April, however it is set to be less generous and more targeted.
- Social renters, accounting for about a fifth of UK households, will have their yearly rental growth cap lowered to 7%, instead of keeping pace with inflation.
- There will be an £8bn increase in funding for both the NHS and the education system across the UK.
What does this mean for the housing market?
One of the key messages from the Autumn Statement is that the Chancellor reaffirmed the alignment between the Bank of England and the government about their commitment to tackling inflation, and this bodes well for interest rates. The Chancellor’s statement was relatively well received by the 10-year swap market, a key driver of mortgage pricing. At the time of writing rates have come down fractionally compared to the previous day. While the Bank of England are expected to further raise the base rate at their next meeting in December, it remains unlikely that mortgage rates will rise much, if at all, which is good news for the housing market.
While little was directly targeted at the housing market, today’s announcements provide more clarity for households about their finances and the economic outlook. That said, many households will be paying more tax and high inflation will leave them with less money leftover at the end of the month. This will put pressure on affordability which is likely to persist until inflationary pressures begin to recede in the second half of 2023. Landlords who are planning to sell up will likely be hardest hit from today’s announcement. From April 2023 the average higher-rate taxpaying landlord will see their capital gains tax bill rise from £21,260 to £23,870 from April 2024 after making a gain of over £88k. Given the scale of gains made by landlords over a 10-year period, the effective tax hike will be unwelcomed, but is unlikely to change longer-term behaviour.
Alongside the Chancellor’s statement, the Office for Budget Responsibility (OBR) released their own forecasts, painting a slightly rosier picture than the Bank of England did back in August. They are predicting more economic growth in both 2023 and 2024. However, they’re equally as gloomy about the prospects for the housing market as they were at the start of the pandemic and are forecasting house prices to fall 9.0% between Q4 2022 and Q3 2024. This is mostly on the back of higher interest rates where they’ve assumed the average borrower will be paying a rate of 5.0% by Q3 2024. They also think fewer people will move, with 1.02m homes changing hands in the 2023/24 financial year which will put transactions back to a similar level as in 2020.
Whether the OBR’s house price forecasts prove to be correct will probably be determined by what happens to the path of interest and subsequently mortgage rates. The OBR admit ‘there is significant uncertainty over this forecast’ and should mortgage rates for the average borrower dip below the 5.0% mark, it will markedly lessen the possibility of house price falls next year.
