With the exception of a few too many Dad-jokes, last week’s Budget speech could best be described as ‘dull’. With very little wriggle room as he tries to balance the books, there were few white rabbits for Philip Hammond to pull out of the hat, all with the exception of one: housing.
The Chancellor played along with the Prime Minister’s vision for luring the young vote by promising a £44bn package over eight years to build 300,000 houses a year, increasing the supply of land through a better planning system and training construction workers.
But Hammond’s biggest reveal by far was a cut in stamp duty for first-time buyers. By slashing this up-front tax on the first £300,000 of the cost of houses priced at up to £500,000, the Chancellor has ensured that 95% of all first time buyers will benefit.
As we pointed out in our post-Budget analysis, the effective abolition of stamp duty for young first-time buyers is a bold move, even if it is not hugely expensive in the great scheme of things. It will cost £670m a year in six years’ time. Helpful, but not a game changer for a government that spends around £800bn a year. The bigger question, however, is whether this announcement will be a game changer for Britain’s broken housing market.
Figures out this week show that London’s house price to salary ratio has hit a new record high, which will no doubt pile even more pressure on the capital’s strained property market.
The average house price in London reached an eye-watering £496,000 in October. With average earnings at £34,200 for those living and working in the capital, the house price ratio now stands at 14.5 times the average Londoners’ salaries. In Cambridge and Oxford the ratio is also steep, with the price to earnings ratio at 14.3 and 12.6, respectively.
So despite a significant slowdown in house price growth in recent months, house price unaffordability - especially in the capital - has never been higher. This is unlikely to improve any time soon, given wage growth remains stagnant. In fact, the past ten years in the UK is best described as a lost decade for pay growth.
This of course begs the question whether Hammond’s stamp duty announcement will have any significant impact whatsoever on the plight of first-time buyers yearning to get that first foot on the property ladder. It will make buying a property more affordable, yes, but arguably the biggest hurdle to home ownership remains the issue of saving for a deposit. As the Chancellor himself acknowledged in his speech, it simply takes too long to save for a deposit.
Then there’s the problem of qualifying for a mortgage in the first place - in recent years banks have significantly tightened their lending criteria - looking at both earnings and outgoings, which makes it even harder for young buyers to acquire a mortgage.
There’s also a very real concern that the stamp duty holiday could perversely inflate property prices - putting the housing market even further out of reach of the younger generation. At the same time, as more of us live and work for longer, it’s likely that the need for mortgage borrowing will also be required into later life. The market has been slow to wake up to this need with lending criteria tightened and mortgage lenders typically imposing a maximum age of 70 or 75 at the end of the mortgage term. Britain’s housing crisis is fundamentally an issue of supply and demand and with supply thin on the ground, older homeowners also need the right type of properties to downsize to, so larger homes are freed up for the next generation.
Property may have seemed like a one-way bet for a long time, but it’s fair to say that today the UK housing market faces many longer-term structural challenges. While the Chancellor’s stamp duty cut for first time buyers may provide some much needed positive headlines for a government in turmoil, there are no short-term quick fixes when it comes to the UK’s housing crisis.
As I have pointed out before, if you’re lucky enough to own your property, you’re best off viewing it as a safe and comfortable place to live and enjoy a lifestyle. See it as an asset to use and enjoy but also one that can depreciate in value and incur unforeseen costs. An investment, in contrast, is a place for money to appreciate. Yes, there are risks involved but if you do your research and you’re invested for the long-term, you can grow your capital and eventually generate an income.
If you’re one of those desperately looking to buy your first home, remember that you can always rent a property, but you can’t rent a pension. As alluring as it might be to own some bricks and mortar, it’s no substitute for the regular income a pension can generate in your old age.
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