By Tom Bill, head of UK residential research at Knight Frank
The spring statement contained no nasty surprises for the UK housing market, but it failed to address concerns about the government’s tight financial headroom.
The good news for the UK housing market is that there was nothing in last week’s spring statement that will derail demand.
In fact, the government said it was more dependent than ever on the housebuilding sector to deliver economic growth.
The bad news is that a nagging sense of apprehension hasn’t gone away.
For example, the government’s £9.93 billion sliver of financial headroom remains unchanged despite a series of cost cutting measures, and the true figure may already be lower.
“A 0.6 percentage point increase in Bank Rate and gilt yield expectations across the forecast would eliminate current balance headroom,” the Office for Budget Responsibility (OBR) said.
However, the fact gilt yields have risen by about 0.2 percentage points since the OBR did its original sums means the wiggle room has already shrunk, said Michael Brown, a senior research strategist at financial broker Pepperstone.
The result?
Upwards pressure on borrowing costs and months of speculation over which taxes will have to rise in the autumn Budget to rebuild a buffer that is a third of its pre-Covid average.
Interest rate swaps and gilt yields traded slightly higher in the 24 hours following the Chancellor’s statement as financial markets remained unconvinced. The OBR cut its GDP growth forecast for 2025 to 1% from 2%.
Despite the unease, the property market must be getting used to the prospect of a banana skin around every corner. In recent years, buyers and sellers have faced double-digit inflation, see-sawing mortgage costs, and a global pandemic that shut the market.
The number of UK transactions spiked in February ahead of a stamp duty rise, HMRC said on Friday, and we expect a similar increase in March. Both exchanges and mortgage approvals were up by more than 15% in January compared to last year.
It may not excite headline writers, but the housing market is neither surging nor flat on its back. It’s steady, which should continue in the absence of further shocks to the system.
Financial markets were betting on two further rate cuts this year following the spring statement and there are further signs of stability.
While the number of offers made in the first two months of this year was 8% lower than last year, the number of properties being listed was 16% higher, Knight Frank UK data shows. Some buyers pull back from stamp duty cliff edges but tend to return once the playing field has been re-levelled, as we explored last week.
The Nationwide and Halifax house price indices have been gently falling as a result of this imbalance but have been in positive territory for the last year.
That said, needs-driven buyers in lower-value markets are more active than discretionary buyers in higher price brackets. The number of offers made in January and February in south-west
London was 7% above the five-year average, Knight Frank data shows. The same figure was down 9% in prime central London.
The next potential banana skin for the whole market is 2 April, which is when Donald Trump announces a raft of reciprocal trade tariffs. A 20% tariff on the UK in response to its rate of VAT could wipe out the government’s headroom by the end of this Parliament, the OBR said last week. UK carmakers already face a 25% tariff.
Should the government be so tightly bound by its own fiscal rules and OBR forecasts that invariably prove not to be a reliable yardstick?
“In an ideal world, we would change these very rules, in order to incentivise a more long-term view of the public finances, instead of never-ending short-term tinkering,” said Michael Brown of Pepperstone.
“The issue, however, is that Reeves lacks the credibility among market participants that would be required in order to enact such a change, without causing a significant adverse reaction, and likely spike in gilt yields. Reeves, in light of that, remains stuck between a rock and a hard place.”
Finally, the notion that streamlining the planning system will boost GDP overlooks how housebuilding is demand-driven. The OBR expects a 0.2% uplift to GDP by 2029/30 due to the planning reforms.
Only if buyer appetite is supported by lower borrowing costs and fiscal stability.