Former Prime Minister William Pitt the Younger introduced a brick tax in 1784 to pay for the American War of Independence.
Manufacturers were charged by the brick, which meant they produced fewer but larger units to reduce the overall tax burden. It led to buildings with structural problems, subsidence issues and less ornate facades.
There are many historical examples of the law of unintended consequences, a principle we were reminded of last week.
On Wednesday, we discovered that higher employer national insurance costs had caused the biggest monthly drop in payroll employees since May 2020, a time when the country was coming to terms with a global pandemic.
Thursday saw weaker-than-expected GDP figures for April, with activity being pulled forward into March to avoid tax rises and tariffs. A stamp duty cliff edge at the end of the first quarter aggravated the situation, as we explored here.
Other recent examples of legislation producing inadvertent outcomes include the Renters Rights Bill, which is putting downward pressure on supply and upward pressure on rents. The charging of VAT on private school fees means more pupils will rely on the state sector than anticipated, new figures also suggested this month.
And, of course, there have been reports of wealthy foreign investors leaving the country after the non-dom regime was replaced with something less attractive. Unintended, perhaps, but not unexpected.
The good news about the brick tax is that it was eventually abolished after complaints from builders and architects, and it was decided the revenue was no longer worth the political or economic cost. The bad news is that it took 66 years.
Mortgage positivity
That said, one consequence of last week’s poor economic data is downward pressure on mortgage rates.
The case for cutting more aggressively was also helped by lower-than-expected US inflation last Wednesday. Financial markets are now betting that the Monetary Policy Committee (MPC) will cut twice this year, with 0.25% reductions in September and December.
Even that feels too slow given the deteriorating economic backdrop, said Michael Brown, senior research strategist at Pepperstone.
“The MPC’s ongoing guidance of ‘gradual and careful’ rate cuts appears to be on borrowed time, even if Bank Rate is held steady at the June meeting this week,” he said. He suggested a cut to 4% from 4.25% in August was likely.
“If, at the end of summer, the economic landscape remains as dour as it is at present, and inflationary pressures have subsided as expected, the MPC will likely find themselves considerably behind the curve”, he said, suggesting policymakers would then have to cut more quickly or by a bigger margin.
Any oil price increase due to the unfolding conflict in the Middle East could put upward pressure on inflation and rates, but Brown warned against jumping to conclusions.
“While the situation remains highly fluid and incredibly uncertain, I would caution that we have all seen this playbook – in terms of market reaction – play out numerous times in the past,” he said. “Financial markets are always incredibly quick to price in geopolitical fear but tend to be equally quick to discount it again.”
Beyond the stamp duty cliff edge
One tax that governments have tinkered with repeatedly in recent years is stamp duty (SDLT).
The threshold above which it is charged was lowered to £125,000 from £250,000 in April, which meant a maximum saving of £2,500 for those completing in March. A similar change for first-time buyers created a £11,250 incentive to act. On top of that, the surcharge for additional properties was raised to 5% from 3%.
It, therefore, came as no surprise that last week’s RICS survey for May showed buyer demand and sales were “struggling for momentum”.
The good news was the mood had lifted since April. The net balance of respondents expecting an increase in sales over the next three months was -5%, up from -13%.
The number of offers made is a good indication of future activity, and it was 9% lower in May compared to last year, Knight Frank UK data shows. It’s half the drop registered in April, which is further proof that buyer appetite is returning as the stamp-duty speed bump disappears into the rearview mirror.
“The market took a breather in April, but demand is still there,” said Andrew Groocock, chief operating officer of the estate agency business at Knight Frank. “The problem is that high levels of stock mean the whole buying process has become elongated, and the recovery process is slower.”
Here we explore the size of the imbalance between supply and demand and how asking prices will need to adjust.
Meanwhile, last week’s Spending Review by the Chancellor didn’t influence the debate around the economy other than making future tax rises feel more likely. After the summer holiday, attention will inevitably turn to the autumn Budget and what impact it could have on demand as the housing market gets back on its feet after an uneven start to the year.
