Chancellor announced a flurry of new tax measures in keenly-watched speech
It was billed as one of the most important budget announcements in years – a potentially make-or-break speech for the UK economy with huge implications for the national housing and mortgage outlook.
In the end, financial markets remained largely calm in the wake of chancellor Rachel Reeves’ address to parliament on Wednesday afternoon, although there were still plenty of takeaways for mortgage market watchers to pore over.
Gilt yields whipsawed as Reeves delivered her speech, but there was little sign after her remarks concluded that a big spike was imminent – meaning the UK’s borrowing costs aren’t set to balloon in the near term.
What that means for mortgage rates isn’t yet clear. The Bank of England is scheduled to meet for its final interest rate decision of the year on December 18, and will certainly have taken note of the Office for Budget Responsibility (OBR) downgrading its UK growth forecasts for the next five years.
The OBR, which was at the centre of a firestorm on Wednesday morning when it accidentally leaked its report before Reeves delivered her speech, now expects the economy to grow by 1.5% over the next five years, down from a March projection of 1.8%.
A cooler economy than first anticipated could strengthen the case for central bank rate cuts. But the picture is complicated slightly by sticky inflation projections: the OBR now says the consumer price index (CPI) will end the year at 3.5% and finish 2026 at 2.5%, compared with previous expectations of 3.2% and 2.1% respectively.
Michael Saunders, senior economic advisor at Oxford Economics and a former Bank of England monetary policy committee rate setter, noted that the tax-to-GDP ratio will jump to 38.3% by 2030/31, higher than any level since the OBR began recording data in 1948/49.
But the main takeaway, he said, was that its fiscal forecast "was not as bad as feared." Those tax hikes are required to allow higher public spending and boost the government's budgetary headroom.
That's not to say it's all plain sailing for the economy looking ahead: Saunders said the UK is still in a relatively weak fiscal position, with nothing to boost its sluggish growth outlook in the budget. And the Reeves plan "reinforces the impression that the government is unwilling to take difficult decisions to rein in public spending," he wrote.
For the Bank of England, according to Saunders, today's announcement "is unlikely to affect monetary policy much either way." The central bank's near-term growth outlook will probably remain unchanged, as will its views on the inflaton front.
All that points to a likely rate cut in either December or February, he said, with rates likely to hit about 3.25% by the end of 2026.
Mortgage industry takes a dim view of Reeves’ ‘mansion tax’
The biggest takeaway from the budget for the housing market was a so-called “mansion tax”, introducing an annual charge of £2,500 on homes valued at over £2 million and £7,500 on properties worth more than £5 million.
That tax will raise £400 million for the British government, Reeves said, but was blasted by mortgage professionals operating in the London and Southeast markets.
Another headline measure rolled out by Reeves, a freeze on income tax bands, could also have big implications for the national housing market.
That move could weigh against personal incomes over the next decade, with the OBR now expecting average growth of just 0.25% for the next 10 years allowing for taxes and inflation.
It means first-time homebuyers already struggling to afford a home in pricier parts of the country are likely to see little progress in the years ahead, while homeowners grappling with the cost of living may see only modest relief.
If anything, Reeves’ budget was notable for its lack of measures aimed directly at improving affordability and opportunity, with no new plans for first-time buyers or others trying to get their foot on the housing ladder.
But for now, market watchers will breathe a sigh of relief that investors and bond traders appear to have greeted her plan with cautious optimism – and that an alarming jump in borrowing costs doesn’t seem to be on the way.
