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Tax reform could boost London’s housing market

by International Commercial Investment on May 3, 2018

Source: Financial Times

For years, London’s property market has been a tale of rising prices and ever-increasing demand. But enthusiasm for housing in the UK capital appears to have plateaued. Similarly to the rest of the country, the combination of economic uncertainties and tax changes has resulted in a steady drop in purchases.

According to a new survey from the Royal Institution of Chartered Surveyors, demand for properties has fallen for the 12th consecutive month. The drop has been sharpest in London and the south-east of England. The report also said that prices across the whole of the country are flat, while new instructions from sellers have fallen for the seventh month in a row. Respondents expect the slowdown to continue.

Several factors could be responsible. The UK’s volatile political climate may have hit investor confidence. While the very top end of the market has stagnated for several years, the uncertainty of two general elections could have turned off other segments of the market, too. Brexit could also hold back transactions, as buyers wait to see the result of negotiations. A smooth departure from the EU is still far from guaranteed.

Interest rates have also hit the housing market. Last November’s rise in the Bank of England benchmark rate, to 0.5 per cent, was the first in a decade. The BoE’s Monetary Policy Committee has hinted that further increases are on the horizon. Inflation remains 1 per cent above the BoE’s target, so those with variable-rate mortgages are reluctant to contemplate further borrowing. The Rics report suggests the slowing housing market could even affect deliberations over another rate increase in May.

Although rates remain historically low, mortgage affordability is still a challenge. Until recently, increases in London housing prices came while banks could not make more than 15 per cent of their loans to highly stretched buyers.

Some sellers have also refused to accept that house prices are under pressure. So instead of settling for lower offers, owners are opting to take their homes off the market.

Another factor for the market slowdown is taxation changes. In 2014, then chancellor George Osborne revamped stamp duty to scrap the slab system and replace it with a sliding scale, based on the cost of the property. A tax-free bracket was introduced for homes up to £125,000, plus a new tax for the upper brackets.

The critical threshold was £937,000: purchases over that level paid more stamp duty under the new system. The average London property price is £486,000; all the same, a significant part of the capital’s property market was affected. A year later, Mr Osborne introduced an additional 3 per cent stamp duty tax on properties purchased for renting and second homes.

These changes were designed to balance the market. Their impact, however, was to create disincentives to sell London houses. Instead of trading up or down, homeowners appear to have opted to stay put.

Stamp duty, like other transaction taxes, is arbitrary and inefficient. It could be scrapped entirely and replaced with a reformed council tax that adequately reflects the true value of properties. Purchases of expensive properties still need to be taxed in some form: the housing market cannot be titled in favour of the high end.

Stamp duty reform would be hard to achieve. Even if it succeeds, it would not eliminate all the pain of deflating property prices. But unblocking the top end of the market will have benefits for all London property owners.

International Commercial InvestmentTax reform could boost London’s housing market