Don’t mention the “B” word, unless you’re talking about building!
By Phil Briscoe
For what is officially called a “Statement on the Government’s Plan for Growth” and unofficially referred to as a fiscal statement, when Kwasi Kwarteng gets to his feet in the Commons at 9.30am tomorrow, it will be the most anticipated “non-budget” event we have seen in decades. A new Prime Minister, a new Chancellor, and a new policy direction focused on accelerating economic growth and reducing taxes all add up to something different, and a little bit unknown.
With a set of economic factors that would make some previous chancellors turn to the whisky, Kwarteng will be contending with rising interest rates (up another 0.5% whilst I write this), high levels of inflation, stalling GDP and of course, soaring energy costs.
Commentators are pointing to likely announcements to boost the housing market, but why is this sector so important when energy seems to be the topic of the day?
The housing sector is inextricably linked to GDP, both as a catalyst and as a contributor to the data. Historically, the housing sector makes up somewhere between 15% and 18% of the overall GDP number, and this includes the construction of new build homes, renovation of existing properties and the rental and professional activity that surrounds the sector. However, this does not include construction activity across the wider economy. As a snapshot, in June 2022 when GDP was faltering, the construction sector contributed almost £15billion to economic activity in the UK, including almost £3.8billion on the construction of new homes and over £2.6bn on the repair and maintenance of existing housing stock. This is without delving into the millions of jobs that are created and the tax yields that are derived from the building sector.
The correlation between GDP and real estate is simple – income comes from GDP, income is needed to buy homes and property assets, increasing value of those property assets helps to increase confidence and fuel spending and investment, which in turn supports the continuing growth of GDP. As a result, there is often co-integration of graphs and analysis around GDP levels and real estate values, as the two feed each other.
The fiscal event tomorrow will focus on stimulating the economy by taking less tax off people and helping to boost growth. For housing specifically, the trailed policies are likely to revolve around two areas – reducing stamp duty and introducing investment zones.
The previous stamp duty holiday in 2020-21 was introduced to help get the market moving again after Covid-19 and the evidence is that it worked. In the initial 12-month period, 1.3 million buyers in England paid no stamp duty on their home purchases. Estate agents reported a boom in activity, average house prices rose at their fastest rate for 16 years and in the month after the holiday ended, completed residential transactions were down 63% on the previous month. Stamp duty is a tiered purchase tax with rates at 2%, 5%, 10% and 12%, so can add some pretty significant sums to the transaction of buying a house and when Liz Truss was the Chief Secretary to the Treasury, she criticised stamp duty for “clogging up” the housing market.
More detail is also expected on the creation of a network of investment zones, and possibly the confirmation of up to 12 such regions across the country. These zones would offer low-tax and low-regulation environments in which to encourage investment, including perhaps most notably a relaxation of planning regulations to speed up the delivery of new homes. This policy is very much the other side of the coin of the Truss pledge to abolish “Stalinist housing targets”. The housing sector will be watching closely to see if these zones are in anticipated places such as Yorkshire, the Thames Estuary and the West Midlands as expected, how they will operate and how quickly they can be rolled out to other areas.
The 2008 financial crisis was largely caused by housing, albeit on the banking and finance side of the market but is clear evidence that in the same way that housing market problems can drag down economic performance, a buoyant housing market can deliver a wider economic boost.
We won’t know exactly what is in the statement until tomorrow, and Kwarteng has no shortage of other tax cuts to spend money on with the reversal of the National Insurance increase, cancelling the planned corporation tax increase, adjusting income tax thresholds and so on. However, we can expect one of the themes of this fiscal event to invoke the spirit of Boris Johnson from 2020 when he pledged to “Build, Build, Build to bounce back.” – we will just need to wait a little longer to see if measures to boost both the supply and demand of housing will be enough to avert a significant recession.