Less than a month into his role, Kwasi Kwarteng unveiled his mini-budget that proposed radical changes designed to boost economic growth. Contained within the proposals was a huge £45 billion tax cutting package. The idea is designed to give households more money to spend, thus boosting economic growth. The mini-budget proved highly problematic as the plans were going to be funded almost entirely by fresh borrowing. Furthermore, many proposals most significantly benefit the wealthiest in society. Kwarteng’s mini budget drew criticism from all political sides and even from the IMF. The Bank of England had to step in with a huge £65 billion purchase of government bonds to stabilise markets. For homeowners and potential buyers, the mini-budget created additional problems. While interest rates have been steadily increasing from their record lows, the shock of the mini-budget unleashed a crisis of its own. This article will explore the impact of the mini-budget on mortgage rates and home buyers.
The immediate market shock to the mini-budget was severe. 945 mortgage products were withdrawn from the market in one day, a record number. Over the week following the announcement, over 40% of products were removed from the market as lenders could not accurately price their products. Those products that remained on the market saw sharp rises in prices. Average rates for two-year fixed deals rose by 1% up to 5.75%. Although the removal of some products was pitched as temporary, with more interest rates inbound, a dearth of mortgage products is likely to become the norm.
One of the most concerning impacts of the mini-budget is that now the government and Bank of England are operating conflicting strategies. Typically, central banks and their respective government’s work in tandem towards an economic goal. This is now no longer the case for the UK. The Bank of England has said it is still firmly committed to achieve its 2% target rate of inflation. Currently, inflation sits at nearly 10%. By contrast, although Kwarteng says the mini-budget plans will boost growth and decrease inflation, this is highly unlikely. To decrease inflation, an economy must either increase the supply of goods and services or decrease demand. The Bank of England’s main lever is raising interest rates to make borrowing more expensive, thus, decreasing household and business spending and therefore demand. The Bank is committed to this approach. Conversely, the huge tax cuts for individuals and corporations announced in the mini-budget completely opposes the Bank’s strategy. The tax cuts are designed to increase spending in the economy which will in turn increase inflation. The government is equally committed to this strategy. Former Bank of England governor Mark Carney, criticised the government for this approach, claiming they were “undercutting” their institutions. For homeowners, this disconnect between the Bank and the government will likely mean higher interest rates. The Bank has said it will not “hesitate” to raise rates to achieve its target. It is likely that the Bank will have to raise rates higher than previously anticipated in order to counteract the government policy and bring inflation down.
If rates get too high, there is concern that this will cause a housing crisis. Although mortgage rates had been steadily rising, the mini-budget has made a bad situation worse. Mortgage repayments are set to account for nearly 30% of household income if average mortgage rates hit 6%. By comparison, the last time mortgage repayments hit 30% of income in 1990, the largest housing crash on record followed shortly after. Rates for some two-year fixed mortgages have already passed 6% for the first time since 2008. With interest rates expected to rise to 6%, a household currently paying £900 in monthly repayments could see these repayments rise to over £1600 on a variable mortgage. Such a dramatic increase would simply be unaffordable for many homeowners.
Furthermore, the high mortgage rates will severely dampen demand in the housing market. This could cause house prices to crash leaving homebuyers in negative equity. This is where the value of the property falls below the level of equity they have in a property, meaning they would lose money on the sale. During the 2008 market crash, house prices tanked 18.2%. If a similar decline happened today, the average house would lose £53,000 in value. The average London house would also lose £93,000 in value.
Another element of the mini-budget was the increasing of stamp duty thresholds. This was designed to boost a slowing housing market and increase mobility. First time buyers now only pay stamp duty on purchases over £425,000. For other residential purchases, the threshold was raised to £250,000 from £125,000. While this may help some buyers, rising mortgage rates are likely to negate any benefits of the stamp duty rise.
Taking all into account, the mini-budget exacerbated the impending housing crisis. Interest rates were already rising significantly to combat inflation and mortgage rates were rising in-step. The mini-budget added uncertainty to the market and investors are concerned about the future. Rates are likely to rise even higher and house prices may dip. We must note however, that all hope is not lost. Some analysts are predicting a significant housing market correction but not an all-out collapse. The Bank of England has already said that high interest rates are “not forever”. Once inflation slows, we may revert to some sense of normality. With the cocktail of rising costs and falling disposable incomes, it is possible that this could come sooner rather than later.
