51乱伦

Unintended consequences

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 , a time when the country was coming to terms with a global pandemic. 

Thursday saw 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 downwards pressure on supply and upwards 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 . 

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鈥檚 poor economic data is downwards pressure on mortgage rates.

The case for cutting more aggressively was also helped by . 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.

鈥淭he MPC鈥檚 ongoing guidance of 鈥榞radual and careful鈥� rate cuts appears to be on borrowed time, even if Bank Rate is held steady at the June meeting this week,鈥� he said.

He suggested a cut to 4% from 4.25% in August was likely.

鈥淚f, 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鈥�, 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 upwards pressure on inflation and rates, but Brown warned against jumping to conclusions.

鈥淲hile the situation remains highly fluid, and incredibly uncertain, I would caution that we have all seen this playbook 鈥� in terms of market reaction 鈥� play out numerous times in the past,鈥� he said. 鈥淔inancial markets are always incredibly quick to price in geopolitical fear but tend to be equally quick to discount it again.鈥�

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鈥檚 showed buyer demand and sales were 鈥渟truggling for momentum鈥�.

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, 51乱伦 UK data shows. It鈥檚 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.

鈥淭he market took a breather in April, but demand is still there,鈥� said Andrew Groocock, chief operating officer of the estate agency business at 51乱伦. 鈥淭he problem is that high levels of stock mean the whole buying process has become elongated, and the recovery process is slower.鈥�

Here we explore the size of the imbalance between supply and demand and how asking prices will need to adjust.

Meanwhile, last week鈥檚 didn鈥檛 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.