There appears to be a growing conflict between the Chancellor’s intention to support the housing market and the Bank of England’s view on interest rates.
Only this week Mark Carney made it pretty clear that the trigger for the first upward move in interest rates is most likely to be concern about house price inflation rather than unemployment. However, the Chancellor sustained the very scheme, Help to Buy 1, that triggered the current surge in general house prices.
I know it is odd to think that increased supply leads to higher prices, the exact opposite of classic Keynesian economics. The evidence, however, is there for all to see over the past six months.
The reason lies in the continuing imbalance in overall housing stock, which means that whenever a new development is marketed there is individual excess demand. The developers’ natural response is to raise prices on the further phases of the development and they still sell!
Hence today’s budget will, in my view, lead to an increase in rates earlier than we might have expected. This is equally concerning there are potentially millions of borrowers whose income has remained static in real terms for the last six years of austerity and who will struggle with even the smallest rate rise until the improved economy feeds through into their pay packets and this could be years away for public sector workers. Carney has a very difficult balancing act on his hands.
It is also intriguing that the extension of Help to Buy is only for the equity scheme and not the guarantee scheme which still expires in December 2016. At first sight this seems counter intuitive as it requires actual Government funding rather than the contingent exposure they have under the guarantee scheme.
However, anecdotal evidence suggests that new build represents a very small proportion of loans advanced under the guarantee scheme so Osborne has clearly focused on the need for more homes and the knock on benefits in employment terms.
All this means that irrespective of rate rises the mortgage market will remain highly competitive. Lenders will therefore have to recover their margins on the deposit side of their balance sheet; this, together with the increased flow of cash into new Isas, means that Isa cash rates will continue to be low for the next few years. So how much have these savers really been helped by this Budget for savers?
Mark Chilton is chief executive of MAC Consulting