Will the Autumn Budget hit the housing market recovery?

It is two years since the mini Budget under Tory prime minister Liz Truss and chancellor Kwasi Kwarteng riled financial markets and sent mortgage rates soaring, but could the October Budget bring a new era of uncertainty?

The mini Budget of 2022 spooked the UK markets due to concerns over unfunded tax cuts.

This caused mortgage rates to soar to an average of 6% amid concerns about interest rates rising faster than expected amid already high inflation.

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Mortgage pricing is finally coming down, with some lenders even offering rates below 3%.

Lower inflation and cheaper home loans are now bringing renewed optimism to the property market and house prices are rising again, growing by 2.4% in the latest Nationwide index.

But there are fears that chancellor Rachel Reeves may dampen this enthusiasm with promises of tax rises in her October Budget.

“As chancellor Reeves prepares to deliver her inaugural Budget, the spectre of 2022's disastrous mini Budget looms large,” says Gabriel McKeown, head of macroeconomics at Sad Rabbit Investments.

“With the government's ominous rhetoric of ‘tough decisions’ and ‘painful’ measures, investors are on high alert for any mis-steps that could trigger a repeat of last year's market meltdown."

The mini Budget impact two years on

Interest rates were already rising to tackle inflation amid the energy crisis when Kwarteng delivered his one and only Budget in September 2022.

But worries over unfunded tax cuts pushed up swap rates and, some argue, caused interest rates to rise faster than they should have.

Interest rates increased from 2.25% in September to 5.25% in August 2023 and only started coming down to 5% in August 2024.

This had an impact on the housing market throughout 2023 as mortgage rates rose in response, hitting purchasing power for those looking to buy a property and pushing house prices down for some parts of the year.

Mortgage rates are now dropping and house prices are on the rise.

The average two-year fixed rate is 5.42%, with a five-year deal at 5.09%, according to Moneyfacts.

But research by estate agency brand Foxtons suggests scars still remain from the controversial fiscal update as the cost of borrowing is higher than many are used to.

Its research found that in the 12 months leading up to the mini Budget, there were 821,892 mortgage approvals and 1,277,320 property transactions also took place during this period, with the average UK house price increasing by 8.3%.

However, in the 12 months that followed from September 2022 to August 2023, the total number of mortgage approvals fell to 593,394 - a drop of 27.8%.

Transactional volumes also dropped by 13.3% to 1,107,720 and, as a result of this reduced level of market activity, the average UK house price fell by 1.8%.

Over the past 11 months, just 941,300 transactions have been completed across the UK, Foxtons said.

The number of mortgage approvals over this period sits at 617,266, a 4% increase on the 12 months that followed the mini Budget, albeit still some way off the pace of the market seen in the 12 months leading up to it, the research shows.

“The notorious 2022 mini Budget will go down in the history books, and there’s no denying the immediate and negative impact it had on both the UK property market and the wider economy,” says Guy Gittins, chief executive of Foxtons.

“In the year that followed we saw mortgage approvals, transactions and house prices all take a downward turn, as market confidence dwindled in the face of strong economic headwinds.”

Gittins says buyers have been returning to the market this year as mortgage pricing drops and inflation has fallen, with more offers being made and accepted, and the prices being achieved also starting to climb.

He adds: “Of course, we’ve got some way to go yet before the property market makes a full return to pre-mini Budget health, but current indicators suggest we’re heading firmly in the right direction.”

Despite house prices growing and mortgages getting cheaper, not everyone thinks the market is out of the woods yet though.

Holly Tomlinson, financial planner at Quilter, says: “The landscape remains complex and challenging given the successive financial shocks many people have felt.

“Many homeowners who are on fixed-rate deals fixed before the Budget will soon feel a significant jump in their monthly bills as their current deals expire. 

"Similarly, this situation creates a significant dilemma for prospective buyers, who must carefully weigh the stability offered by fixed-rate mortgages against the potential benefits of tracker mortgages, which might offer lower rates but come with more uncertainty.”

There are also fears that yet another Budget, this time under Labour, could hit the markets.

Tomlinson adds: “While the current trends are positive, and the worst of the fallout from the mini Budget is certainly in the rear-view mirror, the market’s stability is not guaranteed, and vigilance is key.”

Will the October Budget rile financial markets?

It may have been unfunded tax cuts that spooked the financial markets in 2022, but it could be tax rises in October’s update that cause alarm.

Matt Thompson, head of sales at Chestertons, says some aspiring buyers are awaiting the outcome of the Budget before making a purchase as tax rises could hit their purchasing power.

He says: “Another factor will be the Bank of England’s next announcement on interest rates which is scheduled for early November. Should we see another rate cut, some buyers, despite what is being announced in the Budget, will still go ahead with their property search; particularly in London, where demand continues to outweigh supply.”

McKeown suggests the UK property market stands at a crossroad as it is showing signs of recovery but is sensitive to policy shifts and economic headwinds.

“To avoid a similar fate to her predecessors, Reeves must steer clear of several budgetary pitfalls,” he adds.

“Unfunded tax cuts, which prompted a violent market reaction to Kwarteng's proposals, must be avoided at all costs, and any tax changes need to be fully costed and fiscally neutral.

“Additionally, debt sustainability is paramount, with public debt at historically high levels, and any measures that significantly increase borrowing could spook markets and trigger a negative reaction. The government's commitment to fiscal responsibility is crucial in maintaining market stability.”

While repeating the 2022 mini Budget chaos seems unlikely, he adds, Reeves faces a “formidable challenge” in delivering a Budget that satisfies both economic necessities and market expectations.

He adds: “The fate of the UK's economic credibility hangs in the balance, with the question being whether Reeves will rise to the occasion or if history will repeat itself in a cruel twist of fiscal déjà vu.”