Budget Housing Measures to Ease Burden and Lift Demand but No Silver Bullet

The political and monetary cost of a long term solution, that increases housing supply and forces down prices, are likely too high for the government to bear. 

Autumn budget measures to tackle the housing supply and demand imbalance are likely to ease the cost burden on first-time buyers, according to economists, although they are not a solution to the problem.

With house prices having become a politically contentious issue, Chancellor Philip Hammond unveiled a range of measures designed to ease the pain for first time buyers in the autumn budget Wednesday.

Most notably the government has pledged to increase funding for development by an additional £15 billion, taking total government funding for local authorities and housing associations to around £45 billion.

Stamp Duty Land Tax will also be immediately abolished for first time buyers purchasing a property up to the value of £300,000, with London based buyers seeing the first £300k toward their property made stamp-duty free.

“By our calculations, this would save an average of GBP 5,000 for the average first time buyer in London (or a sixth of average median income),”says Oliver Harvey, a macro strategist at Deutsche Bank.

By contrast, if the Chancellor had scrapped stamp duty across all price brackets he might have saved the average first time buyer around £11,000, according to Deutsche Bank estimates.

“We expect this to increase house prices by 0.3 per cent, an estimate consistent with our published price elasticities for stamp duty changes.a Most of this effect is expected to occur in 2018,” the Office for Budget Responsibility said Wednesday.

UK house prices rose by 0.4% in September, to £226,367, according to data from HM Land Registry. Prices were up 5.4% when compared with the same period one year ago.

“The OBR assume the cut in stamp duty is passed on into house prices, but as LTV ratios of mortgages would also fall, this still represents a moderate fillip to demand,” Deutsche Bank’s Harvey adds.

With average asking prices topping £226,000 nationwide, buying a home now costs more than eight times the average salary of £27,000.

“The housing market is the Achilles’ heel of the UK economy,” says Kallum Pickering, a senior economist at Berenberg. “The decades-long deficit in annual house building has contributed significantly to the rise in household debt and wealth inequality.”

Meanwhile, Bank of England (Financial Policy Committee) rules require that loan-to-income ratios for mortgages are kept below 4.5 times in the overwhelming majority of cases.

“The long-run benefits from building more houses to limit future price growth are significant,” says Pickering.

Under the status-quo the average earner would need more than £100,000 as a down-payment in order to buy the average home in the UK.

“However, governments have traditionally opted to stimulate demand through policies such as Help to Buy - the mortgage subsidy scheme - rather than tackle the root causes of the supply deficit: poor planning laws, labour shortages and other regulatory problems,” adds Pickering.

To his credit, the Chancellor also set out plans Wednesday to free up the planning system and to strong-arm developers into building more homes than they currently do.

“We are pessimistic about his chances of providing a long-term solution in light of the political challenges facing the sector,” says Pickering. “The critical problem remains that, in the short term, only would-be homeowners are set to benefit from a rise in housing supply and fall in prices.”

Pickering flags that falling house prices can have a negative impact on the balance sheets of existing homeowners, house builder profits and government finances, which poses a risk to the economy.

“As a result, despite the major long-term economic benefits of solving the UK’s housing shortage - such as limiting future debt growth linked to mortgages and increasing wealth among the young - the initial costs are likely to be too high for the current government to face head on.”

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