But there were other initiatives in the chancellor’s announcement – albeit of a more technical nature – which could have a far more profound effect on mortgage and housing markets. Today, we assess the Budget measures and give our reaction to them.
The economic backdrop
The Budget was delivered against a challenging economic backdrop of rising inflation, weakening prospects for short-term growth and higher-than-expected government borrowing in the medium term.
The chancellor had already set clear priorities for fiscal recovery in his emergency Budget last year, and did not deviate from them in his recent announcement. That left him little room – or money – for manoeuvre.
The Office for Budgetary Responsibility (OBR) sees growth continuing to accelerate over the next few years, but more slowly in the short term. It now forecasts 1.7% real growth in gross domestic product (GDP) this year (down from 2.1% previously) and 2.5% in 2012 (2.6%).
Given the economic and financial backdrop, and the chancellor’s commitment to stick to the fiscal script set out in the emergency Budget last year, it was not much of a surprise that last week’s announcements were broadly neutral in their overall effect.
The OBR still anticipates the structural deficit being eliminated by 2014-15, and net debt as a share of GDP then abating slowly.
The housing market
Despite the chancellor’s efforts to present his Budget as a plan for growth, the reality is that this year will see significant spending cuts on top of January’s VAT increase to 20%.
The cumulative impact on household finances is significant – the equivalent of more than a 2% drop in incomes for much of middle England, according to the Institute of Fiscal Studies (IFS) – and will exacerbate the squeeze on real take-home pay as consumer price inflation outweighs earnings growth. The IFS suggests that households are experiencing the biggest fall in incomes over a five-year period since the 1970s.
As a result, the big picture for the housing market and mortgage lenders is a negative one. One small ray of sunshine is that the Bank of England must continue to weigh the need to counter some of the deflationary impact of fiscal policy and this should moderate the speed and extent of rate increases this year.
Measures affecting lenders announced by the chancellor included a £250 million FirstBuy scheme (a diluted version of HomeBuy Direct which ended last year) and a further one-year extension to support for mortgage interest (SMI) arrangements.
The CML's view: help for first-time buyers
We welcomed the assistance for first-time buyers, although the new FirstBuy scheme is less generous than its predecessor, HomeBuy Direct. Under the new scheme, a first-time buyer will be helped by a loan of up to 10% each from a developer and the government.
Buyers will also provide a deposit of 5%, enabling them to take out an attractively priced mortgage at a 75% loan-to-value ratio.
Under HomeBuy Direct, however, first-time buyers were able to take out an equity loan of 30% of the value of the property, funded jointly by the developer and the government.
The less generous terms for FirstBuy will help make limited government funding go further, but will deny access to some who would have been able to get a loan through HomeBuy Direct.
Like its predecessor, FirstBuy applies only to newly-built property because it has been launched with the financial support of developers, for whom the scheme may, ultimately, provide the greatest short-term benefits.
FirstBuy is intended to help 10,000 into home-ownership over two years, against a backdrop of 800,000 would-be first-time buyers that we estimate have been excluded from the market by affordability constraints since 2007.
The scheme will cost £250 million (£210 million for England, and £40 million to be administered by the devolved administrations in Scotland, Wales and Northern Ireland). Although the equity loan is free for the first five years, it will be repaid on the sale of the property.
Although lenders welcome support for first-time buyers at a time when government funding is under pressure as a result of the deficit reduction plan, the scale of the FirstBuy initiative is modest, even measured against an already significantly diminished existing first-time buyer market.
In each of the last three years, first-time buyer purchases have totalled a little over 190,000, figures that are dwarfed by the long-term average of around half a million annually. If FirstBuy succeeds in helping 5,000 buyers in each of the two years for which the scheme is scheduled to operate from September 2011, that would equate to help for around 1% of first-time buyers in a "normal" year.
Support for mortgage interest
The chancellor also said he would extend for another year both the reduced 13-week qualifying period for support for mortgage interest (SMI) and the raised capital limit of £200,000. Both will now remain in place until January 2013.
While this measure is also welcome, it would be more helpful for borrowers and lenders for the government to commit to providing this support in the longer term. Lenders would welcome a move away from what is in danger of becoming an annual cycle of uncertainty over access to SMI.
Benefit recipients also remain exposed to the kind of arbitrary change in benefit like the one announced by the chancellor in his emergency Budget last year. This led to a reduction from last October in the rate at which SMI is paid from 6.08% to 3.63%, equivalent to a 40% reduction in payments overall.
We would like to see the government undertake to help develop a better integrated s
