UK Housing Market Holds Steady Despite Government Walking Fiscal Tightrope

The good news for the UK housing market is that there was nothing in last week’s spring statement likely to derail housing demand. In fact, the government said it was more dependent than ever on the housebuilding sector to deliver economic growth.

The bad news however, is that the nagging sense of chop-change apprehension hasn’t gone away. The government’s £9.93 billion sliver of financial headroom remains unchanged despite a series of cost cutting measures, and the true figure may already be lower.

Interest rate swaps and gilt yields traded slightly higher in the 24 hours following the Chancellor’s statement as financial markets remained unconvinced. The OBR cut its GDP growth forecast for 2025 to 1% from 2%.

Despite the unease, the property market must be getting used to the prospect of a banana skin around every corner. In recent years, buyers and sellers have faced double-digit inflation, see-sawing mortgage costs, and a global pandemic that shut the market.

The number of UK transactions spiked in February ahead of the looming stamp duty rise, and the same is expected for March. Both exchanges and mortgage approvals were up by more than 15% in January compared to last year.

The next potential banana skin for the whole market is April 2nd, which is when Donald Trump announces a raft of reciprocal trade tariffs. A 20% tariff on the UK in response to its rate of VAT could wipe out the government’s headroom by the end of this Parliament, the OBR said last week. UK carmakers already face a 25% tariff.

In an ideal world, we would change these very rules, in order to incentivise a more long-term view of the public finances, instead of never-ending short-term tinkering. It's unfortunate that Reeves lacks the credibility among market participants that would be required in order to enact such a change, without causing a significant adverse reaction, and likely spike in gilt yields. Reeves, in light of that, remains stuck between a rock and a hard place.

The notion that streamlining the planning system will boost GDP overlooks the fact that housebuilding is demand-driven. The OBR expects a 0.2% uplift to GDP by 2029/30 due to the planning reforms. Could be...but only if buyer appetite is supported by lower borrowing costs and fiscal stability.