UK Interest Rate Cut: What It Means for Landlords and Tenants After the Budget Announcement

The UK government’s October 2024 budget marked a significant moment, with announcements of more borrowing, increased taxes, and additional spending. While these plans aim to stimulate growth through infrastructure and social initiatives, they also carry substantial implications for the housing market—particularly for landlords and tenants.

The Budget and Mortgage Rate Outlook

A key consequence of the budget is its impact on mortgage rates, largely driven by the £70 billion increase in government borrowing to fund various initiatives. This borrowing surge typically leads to higher bond yields—the interest rate the government pays to investors. As the government competes for funds in the financial markets, the cost of borrowing across the economy rises. For homeowners and prospective buyers, this means higher mortgage rates.

The Office for Budget Responsibility (OBR) has forecast that average mortgage rates could increase from 3.7% to 4.5% over the next three years due to the rise in government borrowing.

Despite these projections, the Bank of England has still proceeded with the anticipated November interest rate cut of 0.25%, lowering the base rate to 4.75%. However, the Bank also cautioned that the degree of inflationary pressure and wage growth remains uncertain. Its revised inflation forecast suggests that it will adopt a more cautious stance towards further rate cuts. If inflation proves stronger than expected, the Bank may even choose to raise rates in the future.

This uncertainty surrounding future rates has already been reflected in market sentiment, with major lenders warning that mortgage costs could remain elevated for longer, affecting both mortgage affordability and household budgets.

Impact on Renters and the Rental Market

The UK housing market is feeling the effects of the government's budget policies, particularly in the rental sector. In response to the budget's impact, the National Residential Landlords Association (NRLA) has raised concerns, especially regarding the increase in stamp duty on homes to rent. The government’s decision to hike stamp duty on rental properties from 3% to 5% will likely reduce the number of homes available for rent, further exacerbating the current housing shortage.

According to the NRLA, the stamp duty increase will result in the loss of approximately 500,000 rental properties over the next decade, as landlords are discouraged from purchasing additional homes. Ben Beadle, Chief Executive at the NRLA, criticised the decision, stating: “Hiking stamp duty on homes to rent when 21 people are chasing every rental property makes no sense.”

Research by Capital Economics confirms this, noting that such a policy would exacerbate the ongoing housing crisis. The research estimates that the increase in stamp duty could lead to a significant decrease in rental property supply, with 230,000 fewer private rental properties purchased and 310,000 more properties sold over ten years, resulting in a net loss of 540,000 rental homes.

Consequences for Renters

The impact of these policies is already being felt by tenants, as competition for rental properties intensifies. According to Zoopla, there are now an average of 21 people competing for each available rental property—more than double the pre-pandemic level. With supply failing to meet demand, rents are rising rapidly, putting more pressure on tenants.

In response to the budget, Paul Johnson, Director of the Institute for Fiscal Studies (IFS), warned that higher taxes on landlords would inevitably lead to higher rents. “The more harshly that landlords are taxed, the higher rents will be,” Johnson stated, echoing a growing concern that fiscal policies targeting landlords could burden tenants.

What Tenants Really Need

Ultimately, the housing sector needs a comprehensive approach to alleviate the strain on renters. As Ben Beadle pointed out, what tenants need is not higher taxes on landlords but an increase in the supply of high-quality rental housing. Unfortunately, the government’s current strategy risks reducing rental property availability and raising rents, making it harder for renters to find affordable homes.

In conclusion, the government’s budget and the Bank of England’s decision to cut interest rates have set the stage for a more complex housing market in the coming years. For landlords, higher borrowing costs and taxes could curtail property investments, reducing supply and driving up rents. For tenants, this means a more competitive rental market and, likely, continued rent increases as demand far outstrips supply. The challenge now is for policymakers to adjust their approach to ensure that renters can access affordable housing in the face of these mounting pressures.