U.K. Autumn Budget delivers positive news for housing sector against mixed short-term market response

Market Update

Autumn Budget

• Chancellor Rachel Reeves delivered the Autumn Budget in Parliament yesterday, announcing £40B in tax hikes, spending cuts, and plans to raise government borrowing.
• Gilts rallied during the presentation, reaching their lowest intraday yields around 13:00 before selling off and peaking at their highest intraday yields just after 15:00. Throughout the day, gilt yields swung c.20 bps from high to low, eventually closing just three to 5 basis points below the previous day’s close.

• The budget amended fiscal rules to allow up to £50B in additional government borrowing to fund infrastructure and federal services, including housing and healthcare.
• Leading up to the Budget, there were questions about the specific sources of increased tax revenue. The Autumn Budget indicated that sources will comprise increases in (i) employer NI contributions, (ii) capital gains tax, and (iii) other sources including inheritance tax, fuel tax, and stamp duty.
• Prior to the Autumn Budget, Chancellor Reeves announced a £500M top-up for the Affordable Homes Programme.
• The Budget also confirmed the continuation of CPI+1% in a five-year rent settlement, prompting continued calls for a longer-term settlement.
• Right to Buy will also be reformed through decreased discounts, which alongside increased support for the development of new homes, helps preserve available stock of affordable homes and contributes to the ambitious goal of delivering 1.5M homes.

CPI and central banks

• U.K. annual CPI rose 1.70% in September, below economists’ forecasts of 1.90% and the lowest level since July 2021. Services CPI, a key metric for the BoE, rose 4.90%, from 5.60% in August.

• There is growing speculation over how the latest CPI print will impact future BoE rate decisions. The pace of rate cuts will be influenced by the post-budget sentiment and ongoing evidence of easing inflationary pressures, particularly in the services sector and the labour market.
• Our Q3 business plan assumptions reflected one further 25-basis-point rate cut by the end of the next two meetings in November and December.
• Governor Andrew Bailey has stated in recent remarks that the BoE may take a more “activist” approach with further improvements in economic data.
• Following the Autumn Budget, the sterling overnight swap markets are pricing in c.90% of a 25-basis-point cut in the BoE November meeting and c.40% of a 25-basis-point cut in the December meeting.
• In the eurozone, the European Central Bank (ECB) has delivered three rate cuts this year, the first back-to-back rate cut since 2011, taking the deposit rate to 3.25%. This has come after concerns of a constricting economic growth and business sentiment in the eurozone.
• The U.S. Federal Reserve embarked on its rate-cutting cycle on 18 September with a 50-basis-point rate cut on the fed funds target rate to 4.75%–5.00%. The Fed’s median dot plot suggests two additional rate cuts by calendar year-end.

Sterling rates

• U.K. gilt yields are 25 to 36 basis points higher than September, partly driven by concerns of fiscal rule changes leading up to the Autumn Budget. Year-over-year yields remain lower across the curve, with the greatest shift in shorter-term maturities.

Funding markets

• Barclays and Lloyds announced a new £1B retrofit funding package, guaranteed by the National Wealth Fund (NWF) — formerly the U.K. Infrastructure Bank.
• Earlier this year, NWF and The Housing Finance Corporation (THFC) announced plans to provide £150M of additional capital markets debt to the sector, with the government guarantee behind a portion of the funding. The debt is expected to be unsecured, and proceeds will be tied to retrofit projects.
• These are positive developments in response to the sector’s increasing call for new financing options that meet both business plan and corporate objectives, including improving the quality and sustainability of homes.
• We will be monitoring the competitiveness of the joint funder and NWF programmes, especially as it relates to price, security, and flexibility provided in commercial covenants for sector borrowers.

Indicative pricing