Rachel Reeves, with her customary glass of red wine in hand, celebrated her first Budget alongside Treasury civil servants in a Westminster pub. She was greeted like a superstar, or “Beyoncé for nerds”, as one official put it.
But the following day the unintended consequences of her choices were playing out. In a series of morning interviews, she was forced to admit a rise to employers’ national insurance contributions – even if it doesn’t appear directly in payslips – would affect the working people she had designed her Budget to protect. Every political choice has a knock-on effect.
And as some farmers threw their hands up at the prospect of not being able to hand over estates intact to the next generation, renters were also examining her plans. For the 4.6 million households who rent, the immediate question was whether a change designed to help them would also have unintended consequences.
A surprise 2 per cent hike to stamp duty for second homeowners was introduced to dampen demand from investors and landlords and came from a clear ideological direction. However, while the measure was designed to deter investors in favour of first-time buyers, and is consistent with Reeves’s narrative of helping working people, it could have the opposite effect than the one intended. Landlords could look set to sell up or decline to invest and in turn rents could rise.
Lucian Cook, director of Residential Research at Savills, told i the stamp duty change will mean “fewer smaller, and more amateur landlords in the market. But it is also likely to affect the appetite of larger wealthier landlords, who have become increasingly important in providing homes to rent, at a time when the Renters’ Rights Bill is adding to the regulatory burden. This is likely to further entrench a lack of rental supply, putting continued upward pressure on rents.”
For young people currently at university or doing their A-levels, the picture is even bleaker. “We used to talk about the housing market in terms of the haves and the have-nots,” Cook added. “This will become true of the rental market. People who are in long-term rentals now and settled will have more protection, but anyone looking to rent in the next five years is going to have very little stock to choose from.”
Measures kept by Labour to help first-time buyers including mortgage guarantees have had a relatively low rate of take up, according to housing market analysts. Instead, a fall in interest rates would have a greater effect. That now looks unlikely to happen, at least in the short term.
That’s because the independent regulator, the Office for Budget Responsibility – entrenched as the high priestess of economic governance by Labour – has warned of the adverse economic and monetary effects of the Budget. Reeves’s choice of extra spending to boost public services could cause a bump in inflation next year.
All eyes will be on the Bank of England’s verdict on the inflationary consequences of the Budget and whether, as some predict, this will mean interest rates don’t come down as quickly as forecast. Some renters may decide they still can’t afford to take the leap and buy. Meanwhile buy-to-let landlords servicing mortgages will keep rents elevated.
It’s a grim picture for those people aged 18 to 40 who overwhelmingly voted Labour in July and who are trying to get onto the housing ladder. Rents hovered around 30 per cent of tenants’ gross income last month, up from an average of around a quarter in the last five years. In London rents can reach 40 per cent, while in Manchester renters are paying out a whopping 46 per cent of income.
That’s a lot of spending tied up that could be spent stimulating growth in other parts of the economy. To be fair to the Government, they have put homebuilding at the heart of their programme. They hope to fix the housing crisis by building an average of 300,000 homes a year, a tremendous target only last achieved when the Beatles were splitting up in the late 1960s.
But while Reeves’s intentions were clear, the stamp duty change risks undermining the market, as too many people remain stuck in expensive rented homes – if they can find one to rent at all. “I am increasingly worried about renters in my patch,” one Labour MP told i, discussing the Budget. “There is no way we are going to build enough homes in time to catch up.”
Landlords and second homeowners breathed a sigh of relief when Reeves decided not to raise the capital gains rate tax charged for higher-rate taxpayers selling a second home. That’s after former Tory chancellor Jeremy Hunt dropped the higher rate to 24 per cent to encourage holiday homeowners to sell.
Any relief however was immediately tempered by the stamp duty rise. Where she giveth with one hand, she also taketh away. But it’s a problem for another day.
None of this will unduly worry Reeves. She’s riding high in Westminster. Ahead of her pub outing on Wednesday evening, she attended the Parliamentary Labour Party meeting in the House of Commons. She received a standing ovation, according to MPs in the room.
“What a lot of people feared would be a lot of tax rises without any real spending and so everyone was pleased,” a Labour MP told i. “She surprised quite a few on the left who were thinking this was going to be terrible, and she’s actually done a lot of things that they wanted on things like carers and miners’ pensions.” Another MP spoke of the “warm feeling that comes from doing the right thing, on contaminated blood, and the Post Office, doing these things that the previous government just put on the shelf”.
Reeves has made Labour MPs feel good about themselves, and that will go a long way to riding out any unintended consequences of her Budget.