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Budget 2013 – Initial reaction for investors

Wednesday, Mar 20 2013 by
7
Budget 2013  Initial reaction for investors

With virtually no money to play with, Chancellor George Osborne has proposed a ‘fiscally neutral’ Budget, but there were a few point of interest for investors… 

  • An abolition on the payment of stamp duty (0.5pc) from next April on the purchase of shares quoted on the Alternative Investment Market in a move designed to force capital into smaller companies. This should remove the distortion between investing in shares and spread-betting for those stocks and should help liquidity. Read more about this here. Marcus Stuttard, the head of AIM, has been reported as saying that stamp duty is a barrier to capital raising for small caps. Separately, the Government is already consulting on allowing investors to buy shares through ISAs. 

  • All the major housebuilders have seen their share prices rise on news that the Government is set to pump more cash in to supporting buyers of new homes. The ‘Help to Buy’ shared equity scheme will see the Government lend up to 20pc of the cost of a new home to help potential buyers secure a deposit and mortgage. Buyers will have to stump up a deposit of 5pc before the Government steps in with interest-free loans of up to 20pc on homes worth less than £600,000. A second part of the scheme involves a £130bn mortgage guarantee scheme to help current homeowners move up the property ladder. 

  • Shares in UK gas producer Igas Energy (LON:IGAS) jumped on news that the Government will introduce a new tax regime for shale gas development in the UK to promote early investment. 

  • Confirmation that the Government will later this year sign contracts for future North Sea decommissioning relief, which Osborne said was already increasing investment there. 

  • R&D credit increased to 10pc – which is good news for innovators. 

  • Shares in many brewers and pub groups have moved into positive territory on news that the beer duty escalator has been scrapped and a penny knocked off the price of a pint.

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11 Comments on this Article show/hide all

kenobi 20th Mar '13 1 of 11
2

I'm concerned about the measures for the housing market,

1) shared equity scheme for new properties. The governement will loan 20% of the sale price of new properties upto 600k, interest free for 5 years. It is unclear what rates will be charged on this money after the 5 years.

I would expect this to push up the prices of new properties, especially in areas that has relatively little new build property. The main winner of this will be the housebuilders who will be able to push up prices, because they will be more affordable (just like miras just lead to higher prices and ended up helping no one).

2) The government are going to guarantee 130BN of mortgages for 3 years starting 2014.
Again, we need to see some details on exactly what that means, but if they're guarenteed by the state, is the state going to get paid for this somehow ? is it some sort of insurance that the banks can take out ? or is this just a blanket deal where the government will be on the hook for a proportion of their (our) £130BN

Now I know both measures are meant to kick start building , a sector which fell 8% last year, and which would really help the growth figures if they could fix that. So, in principle it sounds ok, long term anything that pushes house prices up, we should be wary of. We need the country to be competitive, but if housing costs are going up this puts pressure on wages, and if we get any kind of recovery, there will be upward pressure on wages.

I am pleased that they are doing something to try to get the economy growing, but I'm not sure these measures, messing about in the market are a good thing. Will house prices fall when these are pulled ? will their be a mad rush to get in before they disappear ? The second measure doesn't kick in until 2014, (april I guess), so announcing it now, is that just going to make people think well rates will fall in 2014, so lets wait until then ?

Who is that going to help exactly ???

Cheers K

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emptyend 20th Mar '13 2 of 11
3

In reply to kenobi, post #1

The government are going to guarantee 130BN of mortgages for 3 years starting 2014. ..... The second measure doesn't kick in until 2014, (april I guess), so announcing it now, is that just going to make people think well rates will fall in 2014, so lets wait until then ?

Who is that going to help exactly ???

IMO the point is this:

a) starting in 2014 allows the building industry to gear up, hire workers, order materials and start building in 2013 - so that come the 2014 selling season they actually have some inventory available

b) the time limit of 3 years should certainly encourage anyone who has been waiting to buy a house but having difficulty in raising the deposit. They have a time-limited opportunity to do something - and I'd guess that many will.

So......the building industry will have an immediate reason to get building - and the public will have the opportunity to have the house buying process assisted from next year.

I think that is a pretty bold scheme.

I also think that Miliband's response to the Budget was simply appalling (and looked like Wallace had been on some sort of banned stimulant). It was a rank piece of soundbite propaganda that bore no relation at all to the budget just delivered!  I don't have a good source for the full picture, but this table of gilt yields shows that yields on long-dated gilts fell by 24 basis points in the period surrounding the downgrade on 25th February - so much for those market ignoramuses who were falsely alleging that borrowing costs would be forced higher by the downgrade!!! And so much for Miliband's "soundbite du jour" about the "downgraded chancellor and his downgraded budget".

 

15-Year Gilt Yields - February 2013
        Fri 1st
       
2.60%
gilt yields no change
Mon 4th Tues 5th Wed 6th Thurs 7th Fri 8th
2.60%
gilt yields no change
2.63%
gilt yields up   0.03
2.62%
gilt yields down   0.01
2.63%
gilt yields up   0.01
2.63%
gilt yields no change
Mon 11th Tues 12th Wed 13th Thurs 14th Fri 15th
2.64%
gilt yields up   0.01
2.66%
gilt yields up   0.02
2.76%
gilt yields up   0.10
2.74%
gilt yields down   0.02
2.75%
gilt yields up   0.01
Mon 18th Tues 19th Wed 20th Thurs 21st Fri 22nd
2.75%
gilt yields no change
2.74%
gilt yields down   0.01
2.76%
gilt yields up   0.02
2.67%
gilt yields down   0.09
2.67%
gilt yields no change
Mon 25th Tues 26th Wed 27th Thurs 28th  
2.67%
gilt yields no change
2.55%
gilt yields down   0.12
2.52%
gilt yields down   0.03
2.52%
gilt yields no change
 
  Fig 2: Daily 15-year gilt yields and changes
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kenobi 20th Mar '13 3 of 11
1

IMO the point is this:
a) starting in 2014 allows the building industry to gear up, hire workers, order materials and start building in 2013 - so that come the 2014 selling season they actually have some inventory available

Yes but the mortgage guarantee is not just for new property is it ? Its all property, so it risks doing exactly the opposite of what the government wants, that is, oh well mortgages will be cheaper in 2014 when this kicks in, lets wait until then to buy. Will this guarantee apply to re mortgages I wonder or just newly taken out mortgages ?

The problem with subsidising property, especially new builds is that you get into a situation where they've just done away with child benefit for anyone on higher rate tax, because it's unfair for cleaners to be paying for richer peoples child benefit (as if it wasn't just a tax allowance by another name), and now, we have people earning any amount, or perhaps paying little or no tax, getting a huge subsidy worth well at the top end say 5% of 120k pa for 3 years, so 18,000 pounds over 3 years, but apparantly that's ok, because although there is no requirement for these people to be paying any tax certainly not paye, this won't be being paid for by people who could never dream of buying a 600k house at all.

I do appreciate they want to do something to kickstart building which was down 8% last year and a drag on economic growth , and I applaud them for that. I'm not happy with schemes who's end result will be higher house prices and higher profits for builders, and much of these subsidies will go to people who don't need them, and would have bought a property anyway. I wonder if it will apply for btl properties ? Perhaps some form of means testing should be in place ? this is intended for people who don't have a deposit, I would suggest that if they don't have a deposit and want to buy a 600k house, and they can afford that, perhaps they should buy something cheaper and not expect government subsidies which will have bad side effects to help them.

Not a bad budget, I agree but I think the housing measures will be expensive and end up helping people who don't need help, while doing little for those that do. (in many parts of the country, new builds are very expensive and beyond the reach of people on a limited budget, so how much of this money will go to those who need help ?)

1p off a pint ?? is that really going to make any difference to anything ? A pint costs 300-400p in most pubs.

I didn't think much of milibands retorts either, although damning on the government when you realise how previous schemes have failed, makes you wonder if when they realise the consequences of these schemes they will be watered down or scrapped too. (I refer to the scheme to help 100,000 people buy houses which has helped 15,000 in reality and the loan schemes that were scrapped before implementation).


K


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emptyend 20th Mar '13 4 of 11
2

In reply to kenobi, post #3

Why will mortages be cheaper? It is a guarantee, not a subsidy, aimed at those who can afford to service mortgages but who can't scrape up the deposit.

I haven't looked at the details, but that certainly seemed to be the thrust of the speech.

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SevenPillars 20th Mar '13 5 of 11
3

Although no Government will ever admit to it, whenever they intervene in the housing market with one of their schemes it is always to help prop up price levels and keep prices going up, although they probably prefer steady price rises rather than it running away.

Since the financial crash in 2008, the banks withdrawing all their dodgy mortgages, self-cert, fast track, etc, the logical reaction would have been price falls. Instead what we have seen is a market of low activity propped up by the fact that no recession was allowed to happen, the banking system being propped up and the BoE and Government effectively stepping in as the printer and lender of new money of last resort.

Without this intervention a full blown recession/depression would have made property affordable, but the UK banking system would have been wiped out, the economy would have been on its knees. So now we have Government effectively stepping in to keep the housing market going further with what looks like their own version of Fannie Mae and Freddie Mac. The taxpayer it seems is to be used as the guarantor of UK house prices regardless of whether that taxpayer is a property owner or not.

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kenobi 20th Mar '13 6 of 11

Why will mortages be cheaper? It is a guarantee, not a subsidy, aimed at those who can afford to service mortgages but who can't scrape up the deposit.

surely the cost of a mortgage consist of cost of money, admin, and something for defaults, if you remove the third component, surely they will be cheaper. Still not really that relevant to my point, people might just as well think, I'll wait until next year, it will be easier (and / or cheaper) to get a mortgage.

so it's a guarantee, that removes one of the costs of providing mortgages,  if the prices don't fall there's something wrong !

Either way it has the potential to make people think, it'll be much easier to get a mortgage next year I'll wait until then, exactly the opposite to what the chancellor in his great wisdom intended.

Why are we subsidising the banks by taking the risks from them ? isn't that the job of the banks ?

I agree with sp above, whenever governments intervene in the housing market it's to prop prices up, I would also add, it always causes problems and distorts the market. The subsidy on new homes seems a particularly ridiculous one. No doubt their mates in construction companies will be very happy with that tonight,

K

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macroeconomix 20th Mar '13 7 of 11
1

We do still remember sub-prime mortgages right?

You know .. the banking crisis from a few years back. Or was it all just a dream?

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corrsfan 20th Mar '13 8 of 11
2

Interesting no formal comment on the sale of rbs/lloyds in the budget.

Im waiting for a sipp to be funded so i can buy ~20k lloyds shares @ 50p, since as long as the government keep adding in the likes of these guarantees, and funding for lending etc there's less and less risk on the banks. I just cannot see past lloyds personally., though i know it may take till 2014, for the price to start going up, after the dividend is declared.

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SevenPillars 20th Mar '13 9 of 11
1

It's probably only a coincidence that an IPO happened today that went largely unnoticed. Countrywide Estate Agents came to the market at the top of its range 350p, ending the day, helped by Mr Osborne's intervention at 397p. Surely no one tipped them off? Good day to be an estate agent coming back to the market.

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emptyend 21st Mar '13 10 of 11
2

In reply to kenobi, post #6

surely the cost of a mortgage consist of cost of money, admin, and something for defaults, if you remove the third component, surely they will be cheaper. Still not really that relevant to my point, people might just as well think, I'll wait until next year, it will be easier (and / or cheaper) to get a mortgage. so it's a guarantee, that removes one of the costs of providing mortgages

No - absolutely not! Making a guarantee available for part of the price tells you absolutely nothing about the way that guarantee will be priced!! Absolutely nowhere is it suggested that the guarantee would be "free" - and indeed, IIRC from the speech, it was explicitly stated that pricing for loans that incorporated the guarantee hadn't yet been determined (and would, in any event, be determined by the lender, having regard to the terms that the government wanted for granting the guarantee).

This measure is 100% about availability - making sure that creditworthy borrowers have access to mortgages and those who can't scrape a big deposit together aren't shut out from owning houses. It was made clear that it was important measure for social mobility reasons.

Either way it has the potential to make people think, it'll be much easier to get a mortgage next year I'll wait until then, exactly the opposite to what the chancellor in his great wisdom intended.

As I explained earlier, in order to provide houses for sale next year, builders need to build THIS year! That is precisely what he intended....and, in the meantime, those who may be able to benefit can assess their options. The measure most definitely isn't intended to cause a one-year rush of house moving, either this year or next year. It is intended to stimulate the building of houses and, over a three-year period, kickstart transaction activity in the housing market, so that all the ancilliary activities (carpets, bathrooms, kichens, furniture etc) can benefit from the greater activity - as well as the overall economy being made a little more efficient as more people have the opportunity to move house and reflect their new family/work/travel circumstances in the way they organise, rather than being locked in by the lack of mortgage availability and/or lack of transaction activity!

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kenobi 21st Mar '13 11 of 11
1

I Absolutely nowhere is it suggested that the guarantee would be "free"

but presumably it would be cheaper than any other form of insurance on a mortgage otherwise it's overall effect would be zilch. We'll see what it costs, but absolutely nowhere does it suggest it won't be free. Not saying there will be a charge does suggest it's free to me I'm afraid.

As I explained earlier, in order to provide houses for sale next year, builders need to build THIS year!

but since the guarantee applies to old houses too, there is no reason it shouldn't come into effect immediately.
and this has the side effect of telling people that if they wait a year, mortgages will be easier to get, and if the market is working at all cheaper, especially if they plan to buy new, I assume you agree that the government giving you 20% deposit interest free will make buying new properties cheaper at least in theory and in the first instance ?? (again they haven't said what rates will be after 3 years but not doubt they will be attractive)

I understand what the plans are meant to do, I worry they will have the opposite effect for the first 12 months, the time when the measures are needed more at any time. (and cost a lot of money to boot, money we keep being told can't be afforded).   I worry that much of the money will be wasted with people buying new properties subsidised by the government,  they will effectively be subsidising all new properties,  even those that would have been bought anyway,  by people who don't need 20% loan for a deposit.  So I wonder how efficient a method of promoting building.

Not sure I agree with the idea that people should be able to get a 20% mortgage subsidy on a second home either, although thankfully btl purchases have been ruled out, no doubt people will buy with normal mortgages and let them out anyway. Perhaps the money might have been better targeted to provide affordable housing rather than a subsiding all new build.  For example the london market is very strong,  yet from next year,  any new build under 600k will be elidgable for the subsidy, costing the government a lot of money and achieving little or nothing. 

we have to be clear which of the measures we're talking about ,  the 20% interest free deposit loan is clearly a subsidy,  I contend most of this money will go to properties that would have been sold anyway.  the guarentee,  we'll have to see how it's priced,  I suggest it will make mortgages cheaper and more available,  even if this is not true,  I won't be the only person thinking this,  which will lead some people to wait a year rather than buy now.

K

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