The Summer Statement: July, 2020 (Coronavirus Mini-Budget)

On July 8th 2020, the chancellor announced the government’s summer statement which outlined new measures totaling £30 billion with the aim of that money to stimulate the economy and allow GDP to bounce back to pre-covid levels.

The main talking points from the statement was the stamp duty holiday for all residential properties up to the value of £500,000, the government’s strategy for tackling the potential unemployment crisis as well as a focus on investment in a cleaner economy.

This insight will break down these main points further and will look at not only how effective they will be but also what effect they will have on the UK economy and property market.

Perhaps the biggest statement made by the chancellor during the summer statement was the announcement that effective immediately, there will be a stamp duty holiday for all residential properties up to the value of £500,000.

This is much needed news for the property market which has stalled over the last few months due to the lockdown. The policy will run until 31 March 2021 and will allow purchases of dwellings to have a stamp duty tax of zero. However, the purchases of additional dwellings by individuals and purchases of dwellings by companies will continue to be charged Stamp Duty at 3% surcharge up to £500,000.

The government’s intention behind this is to stimulate the stalled property market and is likely to lead to a spike in property completions leading up to March 2021. Furthermore, since the tax is paid after completion of a sale, anyone part way through a sale is exempt and can therefore spend that money either towards their deposit or on furniture and home improvements therefore pumping more money into the economy.

To work out how much money this could save consumers, we can look at the average price of a house in the UK and see how much they would typically pay in stamp duty tax. According to the most recent data, the average house price in the UK is £231,855. This would result in a stamp duty of £2,137. We can then multiply this number by the number of transactions in England and Northern Ireland (the stamp duty holiday only applies to these areas as Wales and Scotland have their own system). Last financial year there were a total of 1,016,070 residential property transactions over £40,000. This would therefore mean an average annual saving on stamp duty of £2,171,341,590.

Of course the stamp duty holiday is only 8 months long so the actual saving to consumers is more likely to be around £1,628,506,193 (£1.6 billion). However, it must be noted that although on the surface it looks like the government wants people to save this money, their actual aim is to redistribute where this money is being spent. Instead of that money being given to the government, they want consumers to go out and spend that money on other goods and services so that the money circulates throughout the economy. The housing market tends to have a knock-on effect on other parts of the economy (besides everyone employed in the sector), whereby those people moving house tend to spend around 5% of the property’s value at DIY shops and furniture shops.

Over the past few months, the UK property market has stalled with buyers and sellers being told to hold purchases due to a restriction on house moving during the lockdown. In recent weeks though, estate agents have reopened and there are signs that people are starting to look to move again, with property websites and mortgage lenders all reporting jumps in interest from prospective buyers. It therefore seems like the stamp duty tax relief is aimed to boost the demand from property buyers further so that the housing market bounces back as quickly as possible.

Regionally, the savings from paying zero stamp duty will have the biggest effect on buyers in London. As mentioned before, the average house price in the UK is £231,855 however when looking exclusively at London where the average house price is £485,794, the average saving increases from £2,137 to £14,289. In terms of what effect this will have on the UK property market, the stamp duty holiday is designed to support values and therefore reduce uncertainty in the market.

As mentioned in previous market insights, the UK property market, like all other markets, will either decline or stall during times of uncertainty (as most people tend to sit on the fence). The strategy of the government is to take away that uncertainty by offering an incentive for people to buy homes in the UK. The savings being made helps to go towards those buyers looking to use the help to buy scheme, whereby the savings can go towards the 5% deposit needed to get on the housing ladder. This therefore leads to increased demand for property with prices either standing strong or starting to increase in parts of the country where the market is in high demand.

Within the Chancellor’s summer statement, the government is also looking at the best way to tackle the potential unemployment crisis that is facing the UK economy as a result of Covid-19. It seems there are four main tasks that need to be achieved before we can overcome the crisis:

1. Support existing jobs;
2. Mop up labour supply;
3. Activate the unemployed; and
4. Provide job guarantees for young unemployed people.

It appears that the government shares these views as the summer statement aims to solve all of these issues.

During the Chancellor’s summer statement, the job retention bonus was announced which aims to encourage firms to retain their furloughed staff. The proposal aims to reward businesses who have had to furlough staff to keep those staff members employed to the end of January 2021 with the government giving employers £1,000 for every furloughed employee who is retained. By giving these employers an incentive to retain their employees it means that more people are going to keep their existing jobs than if the proposal was not announced.

A further action that has been put into effect that will support existing jobs is the cut in VAT from 20% to 5% for restaurants, hotels and attractions. This policy will come into effect from 15th July, 2020 and will run right through to 12th January, 2021. Due to the nature of how these sectors price their products, it is very unlikely that prices of products will actually fall meaning that consumers will still be paying the same price for a good. However, who really benefits from this is the businesses themselves, by charging the same price but paying less VAT it means that businesses are able to be more profitable.

With more money being made by businesses they will want to keep existing staff on and perhaps even hire new employees which would help to also solve the second task of mopping up labor supply. Although the ‘Eat Out to Help Out’ scheme does help to solve this problem, that is not the main purpose of the scheme. When looking in depth at the ‘Eat Out to Help Out’ scheme, there is very little money involved. The scheme is projected to only pump around £500 million into the sector, however the main purpose of the scheme isn’t to help businesses but to make consumers more comfortable in going outside.

By offering a small incentive such as the ‘Eat Out to Help Out’ scheme, people will start going to restaurants which will make them more comfortable going outside. Once consumers start to gain more confidence they will then go out and spend money at shops or more restaurants. Therefore the scheme is designed not just to help businesses but more so to trigger a behavioural impact of getting people more comfortable in going outside. As people begin to feel more confident in going outside, they will begin to spend money which circulates money through the economy.

The third task of activating the unemployed is aimed at giving unemployed people access to finding work. Looking at recessions over the past 40 years has taught us that helping people to look for work is one of the most important things we can do to get through an unemployment crisis. The 1980s recession is a good reminder of what happens when job search support is discontinued and it is clear the government is aware of this given what was announced during the summer statement. During the speech, the chancellor announced plans to recruit 4,500 JobCentre Plus staff by October and a further 9,000 staff after that. This shows the government’s commitment not only to keeping jobs, but making sure that those who are still made redundant are able to get back into work as fast as possible.

The fourth and final task is to provide job guarantees for young unemployed people and this is another area where the government has delivered. The chancellor has announced that the UK government will give employers £2,000 for each apprentice they hire under the age of 24 and £1,500 for older trainees. This is a crucial announcement because during a recession it tends to be the younger, less experienced workers who are the first to be made redundant. Now though, even if younger people are made redundant they will now be able to get into a skilled profession through the apprenticeship scheme.

Because now firms have an incentive to take on more apprentices. The government has also extended this scheme for trainees, whereby every trainee that a company employees will result in that company receiving £1,000 for new trainees aged 16-24 in England. Another innovative scheme the government announced was the “Kickstart Scheme”. This scheme is a £2bn fund that will pay for six month work placements for 16-24 year olds who are on universal credit. This therefore means more young people will be in work and contributing to the economy which will help to bounce back the UK economy to pre-covid levels.

In terms of how these policies will affect the property market, if more people are in work then there are more people who will either want to buy or rent properties. If there is increased demand for properties then the prices of those properties are going to increase. Looking at the supply side of the property market, if more people are in work then more people are paying their mortgage or rent, this means there are fewer foreclosures which means there isn’t an excess supply of houses being sold for discounted rates like we saw during the 2008 financial crisis.

Another area that the government focused on during the summer statement was its goal at driving towards a cleaner economy. They did this from focusing on schemes such as the green homes grant, decarbonisation as well as infrastructure projects.

The green homes grant which was announced during the summer statement allows households up to £5,000 for projects that will make their homes more energy efficient in England. The government has also said that they will match what owners and landlords spend on energy efficient upgrades with £2 for every £1 spent and lower income households will receive £10,000 fully funded for projects that make their homes more energy efficient. This is therefore not only a great incentive for businesses who supply these upgrades but also to homeowners, landlords and renters.

Homeowners and landlords benefit in the sense that they are able to upgrade their houses at a much cheaper rate than before since some or all of the cost is covered by the government. This also has potential to increase the value of homes that have been upgraded. Renters and homeowners will benefit further from the fact that a more energy efficient house will result in cheaper bills meaning this grant does not represent a one off saving but a long term saving for households. This is especially useful coming out of Covid-19 as money is likely to be tight for a lot of households, therefore having cheaper bills will help to alleviate this problem.

The government also announced that they would pledge £1bn in grants to public sector bodies to allow them to improve their energy efficiency as well as £50m towards a social housing decarbonisation fund which would aim to improve the energy efficiency of socially rented homes. Similarly, these grants will help to boost firms who specialise in energy efficiency for both the residential and commercial sectors and by making socially rented homes more energy efficient, the government is making those homes cheaper to run thus benefiting the low income tenants who live in these properties. Although this strategy will benefit households, perhaps the largest benefit will be the investment into the sector that will be generated from these grants.

As already mentioned, it is now cheaper for households to upgrade their homes in order to make them more energy efficient. In turn this will create a higher demand for energy efficient products and will therefore benefit the firms who make them. Because of this, we will find more investment into this sector as there is now effectively more money to be made due to the increased demand. Like when there is any large investment into a sector, the UK economy will benefit from this as there will be a knock on effect. As these companies selling energy efficient products begin to grow and investment comes into the sector, the employees of these firms will have more job confidence and perhaps even higher wages. This in turn will cause those employees to go out and spend their money in other parts of the economy which means more money is circulating as more transactions are being made. This will therefore cause the UK economy to grow.

A similar stance can be taken when looking at how this will affect the the UK property market, whilst homes could increase in value due to being upgraded with energy efficient products, there will also be an entire sector directly benefiting from these grants and the rest of the economy indirectly benefiting, this means more people have job confidence and more money which would result in more people wanting to move house. A higher demand for properties will therefore mean the prices will increase.

Another announcement the government made was a £5.6bn package of infrastructure projects which would include the construction of hospitals, schools, transport and housing. The benefits from this investment is similar to that of the aforementioned in that it allows more money to be circulating through the economy. The biggest sector that benefits from these projects is of course the construction sector whilst the rest of the UK will benefit as those workers go out and spend money within the economy.

In terms of the UK property market, not only will we see the market improve due to more people having job confidence and more money, but we will also see new development start to form around these infrastructure projects due to the attractive investment opportunities these projects bring. If a new hospital or school is being built, more people want to live closer to that area, which in turn means more development will happen in and around that area. As a result, subsequently people are employed to build these developments which means both the UK economy and property market benefit further.

In conclusion, the policies set out in the summer statement aim to get people outside and spending money by offering consumers incentives to spend and employers incentives to employ people. The main ways they are encouraging consumers to spend their money is by offering a stamp duty holiday for residential purchases up to £500,000, offering the “Eat Out to Help Out” scheme and by offering grants and investment into a cleaner economy and infrastructure projects.

In terms of how the government aims to tackle the unemployment crisis, they want to keep people employed and offer new employment opportunities for those who are already unemployed. They are doing this through offering bonuses to businesses who keep on furloughed staff, making it easier for those seeking employment to find roles which suit them and by also offering companies incentives to take on more apprentices and traineeships. The cleaner economy grants and infrastructure investment will also help employment as it allows more companies to become more profitable where they will then expand.

Whilst these policies will directly affect the UK in a positive way, they will also have a positive impact on the UK property market, as more people become employed and job security begins to set in, more people will start to go out and spend money.

In our last market insight, we outlined that the UK economy and property market would have recovered back to pre-covid levels by around March next year, and with these schemes in place it looks likely that the UK economy and property market will recover by then, if not be above original expectations.