Fixing a broken market: did Hammond miss a trick by not addressing downsizing?

24th November 2017
"We often hear that older property owners are put off from downsizing for a number of reasons, including the cost of stamp duty, so an incentive here might have encouraged more to do this"

There’s only really one place to start and that’s with the Budget and what it might mean, particularly for our sector and our client demographic. As Philip Hammond spoke, and there appeared to be a concerted effort to loosen the ‘austerity belt’, I couldn’t help wonder how he planned to pay for many of the measures.

However, it soon became clear that the detail was in the small print, and Hammond and this Government, have effectively decided that creating a financial surplus is no longer a priority; indeed we’re not likely to have a balanced budget until 2022/23 at the earliest. I wouldn’t be surprised if, due to Brexit, this priority slips even further especially if the Office for Budget Responsibility continue to downgrade the UK’s growth prospects. As we keep hearing, these are genuinely uncertain times and that uncertainty is not likely to do the economy any favours.

In the retirement space, there were few announcements, indeed pension stakeholders have already commented that the silence was deafening in that respect. There was a 3% upgrade in the State pension, and in the small print a further upgrade on Pension Guarantee Credit greater than 3%. And that was pretty much, your lot.
Clearly, the big focus was meant to be around the Government’s housing market strategy and how it intends to ‘fix a broken market’. Thus we had a series of measures designed to improve the supply of new homes, including threats to house builders that are land banking, incentives to SME builders, a focus on outlining areas which could be built upon, the promise of new garden towns, and the like. Given that we saw yearly new-builds climb to over 200k per year for the first time in decades, it was somewhat surprising to hear the Chancellor talking about hitting 300k new homes per year by the middle of the next decade. You might have thought we could get to that number quicker than that, but clearly the Chancellor is hedging his bets on this one.

As predicted, much of this Budget’s housing measures were focused on getting new purchasers onto the housing ladder, and there was the ‘rabbit in the hat’ of stamp duty being waived for first-timers up to £300k, and also a saving for those purchasing up to £500k. The idea is to allow first-timers to save for deposits in quicker time, and the argument is that this is more achievable if they also don’t have to save for thousands of pounds of stamp duty.

Whether this theory actually plays out in practise is another matter entirely. The OBR clearly believe it will have little positive impact for increasing the number of home-owners as it was quickly picked up that it anticipates the main beneficiaries to be existing property owners. That’s because it believes the measure will increase house prices by 0.3% per year, with some pointing out this actually puts homes further out of reach for first-time buyers.

Understandably, given the rampant house price inflation we have seen over the last 20 years, coupled with poor supply, this attempt to improve home-ownership affordability is going to take some time to bed in. Indeed, it doesn’t just need an increase in supply but an increase in earnings in order to make a significant change – wage inflation has not kept pace with house price inflation, and neither does it look like doing so, for some time. So, the question remains - just how positive an impact will such measures deliver?

Overall, however, and with a later life hat on, long-term home ownership does help people fund their retirement, and in that sense we should probably be doing all we can to encourage more people to get on the ladder as early as possible. We’re already seeing big jumps in the number of lifetime mortgages being taken out in order to fund retirement living and responsibilities, and this looks like a trend which is going to continue for some time. A person in retirement who owns their own home has to save less for retirement than one who rents; they do not have to meet the outgoings that come with the payment of rent, which can be thousands of pounds a year. Instead that money goes into purchasing an asset/bulking up equity, which can be utilised in later life. It also creates opportunities to augment retirement savings through downsizing or releasing equity.

In that sense, we do need to support measures which allow younger people onto the ladder, however, I can’t help wondering if the Chancellor didn’t miss a trick here by also incentivising older homeowners to downsize; indeed there are arguments for stamp duty amendments right across the home-ownership spectrum, not just for first-timers. We often hear that older property owners are put off from downsizing for a number of reasons, including the cost of stamp duty, so an incentive here might have encouraged more to do this, freeing up property for those further down the chain and helping move the market on. It might not have made a massive difference but I suspect it would have helped a number to make up their minds to move – potentially to retirement villages/properties – ultimately bringing more supply to the market. Perhaps that could be a measure for next year?

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