What is the impact of the Budget on markets?
In short, very little. This is the second Budget of the year following the announcement that in future the Budget will move from the Spring to the Autumn. Alongside the Budget, we get the latest forecasts from the independent Office for Budget Responsibility ("OBR"). The main news to take from the Budget was around the OBR forecast of lower productivity and economic growth in the years to come.
For 35 years prior to 2008, output per hour had grown by an average of 2.1% per annum but since then it has only grown by 0.2% on average. In March, they had assumed that this would pick up towards the long-term average. They have now reassessed this, causing a reduction in their expectations for economic growth in the years to come, despite measures in the Budget to invest in IT and Research and Development to counter this trend. A downward revision in growth has knock on effects, reducing tax receipts and increasing the government borrowing to meet its commitments. Tax receipts this year have been higher and borrowing lower than expected but with additional spending announced in the Budget, their expectation is for the deficit next year to be flat before rising in the following three years.
There was a reduction in debt, created by the Office for National Statistics' decision to move Housing Associations out of the public sector. For some people, this may sound rather technical but it means that the Government's finances are more constrained in future. Despite this expected change in borrowing, there was little impact on the gilt market. The head of the OBR, Robert Chote, noted that the overall pattern of fiscal measures since 2010 had been a near term giveaway followed by a promise of an eventual takeaway. As he put it, "St Augustine remains the patron saint of fiscal policy: give me chastity and continence but not yet."
It is worth highlighting that the OBR made very little reference to the impact of Brexit; they did note "there remains no reasonable basis on which we can predict the precise outcome of the negotiations". Thus, their forecasts carry a high degree of uncertainty.
During the Chancellor's speech the markets hardly moved. Most of the announcements were trailed in advance. The days when the Budget was a closely guarded secret seem long gone. At an individual stock level, some big house building names fell on the housing initiatives but recovered subsequently. This leads us to the next question...
What is the impact of the Budget and Brexit on the property market?
The Chancellor announced a number of measures to increase housing supply and help first time buyers. There was talk of targets to build 300,000 new homes per annum and to build a million new homes in the Oxford/Milton Keynes/Cambridge corridor. He announced a review of land with planning permission that has not been developed and help for smaller companies. This may be the reason some large homebuilders saw their share prices fall temporarily. Previous reviews on so-called land banks held by developers have had little impact. It is likely that there will remain a shortage of housing for some time to come.
The other headline was around the removal of stamp duty for first time buyers on the first £300,000 of properties up to £500,000 in value. This will be welcomed by first time buyers, but in practice it may be of little help. The maximum saving is £5,000 and estate agents reported that some buyers were just upping their bids by £5,000 to get deals done. The OBR poured cold water on this measure saying that it would on average add 0.3% to house prices nationally and benefit the sellers rather than the buyers.
Turning to the Brexit impact, as noted above, the long-term outcome of negotiations is hard to predict but this week we have seen that two EU agencies agreeing to relocate away from the UK. Many banks are making provisional arrangements for moving some operations to various cities around Europe. The uncertainty is putting downward pressure on house prices in London, but so far is not having much impact outside the South East of England. House prices in London had risen much more than outside and while London is often a market leader, in this case, the impact outside may be less.
On office space, there still appears to be some demand with landmark buildings still finding buyers. The depreciation of sterling means that London continues to be attractive to some overseas buyers, particularly from Asia. In the short–term, we remain cautious on London office space due to the Brexit factor but in the long-run the returns may look attractive. High street retailers have been coming under pressure as shopping moves online. The day after Thanksgiving or "Black Friday" is a big shopping event in the USA. This has been transformed into a "Black Week" of offers and if my inbox is anything to go by, the online retailers are making the most of it. While the Brexit impact may be short lived, this trend is likely to continue. Thus, we are cautious on high street retail property exposure but happier with distribution centres.
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