The RICS Economics team give their analysis of the UK Budget below.
An RICS Policy analysis is also available.
Macro Numbers
Alistair Darling gave little sense of the credit crisis now gripping the UK economy in his budget speech.
Growth expectations, it is true, were scaled back but the risks to the new forecast remains very much on the downside.
Household consumption is still expected to be the key driver of growth over the balance of this year but it is now only projected to rise by between 1.25 and 1.75%.
Given the squeeze on disposable incomes resulting from higher inflation and the reining back in lending activity, there is a danger that even this more modest assessment of the outlook for consumers could prove too sanguine.
Inflation is now forecast by HM Treasury to exceed the Bank of England 2% target for the balance of this year.
We are broadly sympathetic to the view that inflation will slip back towards the target during the course of 2009.
While we have doubts that the Chancellor will meet his public borrowing goal for the current financial year, he has been more realistic in revising up to £43bn the projection for 2008/09.
That said, revenues are expected to pick up sharply in subsequent years.
These estimates could be vulnerable to a more protracted period of subdued growth.
We still expect the Bank of England to lower base rates further over the coming months.
However, recent economic news flow including the CIPS survey of the service sector will make it difficult for the authorities to sanction an early move.
Hard data will need to soften in a more material way to justify the next round of easing.
We are projecting a quarter point cut in May followed by a further half point easing over the summer.
Implications for Residential Property
The RICS does not believe that today’s statement will have a significant bearing on the residential housing market.
The changes in the shared ownership schemes is a sensible policy move which will lessen the tax burden on the financially stretched households, at whom the policy is aimed.
Furthermore, the announcement that people will be able attain shared equity products of up to 50% of a home’s value should ensure that shared equity products are open to an even wider array of lower income households.
However, the scale of shared equity operation will be too low to satisfy the demand from households who find traditional methods of purchasing to be prohibitively expensive.
Eventually, these programs must be expanded to accommodate a larger demand, but this can only take place when the supply of new homes has increased to match the demand from new households.
Price signals from the latest RICS Housing Market Survey point to a decline in house building over the course of 2008.
Meanwhile, the Capital Gains Tax changes could encourage some buy-to-let landlords to capitalise on the returns they have secured in recent years.
According to analysis by the RICS, the biggest impact of the changes will be felt by investors who purchased property in 1999, 2000 and 2001.
Properties purchased in these years would see the biggest reduction in tax as a result of today’s changes, both in absolute terms (where the reduction in tax paid is in excess of £10,000) and when expressed as a percentage of the property value (where the reduction is more than 5%).
According to CML data, 165,000 but-to-let mortgages totalling £13.9bn were taken out during this three year period.
While it is likely that this reduction may tempt some landlords to sell their properties, the RICS does not believe that their numbers will be large enough to have a material impact upon the property market.
The RICS welcomes HM Treasury's attempt to improve the attractions of long term fixed rate mortgages.
We believe that these products have an important role to play in delivering homeowners with a wider range of offerings that may suit their personal circumstances.
However, we do not believe that these mortgages will necessarily be suitable for all.
Many borrowers will continue to have a preference for interest rates that more closely reflect underlying economic conditions.
We also believe there is a strong case for greater transparency on mortgage arrangement fees which have risen sharply in recent years.
Not only do they mask the relative attractions of individual mortgage products but with regular refinancing are proving increasingly burdensome for homeowners.
On the plan to set up a Working Group to look into establishing a Gold Standard for mortgages to help strengthen financial innovation, RICS believes that there will be need to show what this will add to the existing system of ratings of mortgage products.
While agencies are under something of a cloud at the present time, it is far from clear that another body effectively charged with the same responsibilities will fare any better.
Moreover at the present time it is price volatility rather than actual credit risk that is scaring the natural buyers of these mortgage instruments.
