An Englishman’s house is his castle but the view over the Canal la Manche suggests a storm is brewing. On the shores of mainland Europe bureaucrats want to curb this property excess. House prices in the UK have been racing higher while a broader economic recovery in Britain, let alone mainland Europe, seem poor cousins. Now the EU is demanding Britain creams off the fat from property owners with a Mansion Tax – yet the timing could not be worse.
The factors influencing Britain’s buoyant housing market are several. For one thing, foreign investors can access the UK real estate market and are attracted by the entrenched house-buying culture and the idea of parking their cash in a nation where property law is clear and solid.
Britain’s property culture has been boosted by the likes of former premier Harold Macmillan who introduced the now-defunct MIRAS tax subsidy to housebuyers, and premier Margaret Thatcher who while curtailing MIRAS encouraged the purchase of social housing for the first time. The latest Coalition government has also introduced an incentive for first-time buyers, called the Help To Buy scheme. More about that later.
A second factor boosting UK house prices, which have risen by as much as 20% in parts of the south and London in the past 12 months, is that Britons have also figured out that as equities performed sluggishly in the credit crisis, banks were reluctant to lend and pension funds had to switch out of pro-growth shares into defensive investments like government bonds, the best nest egg for the future is property.
The third market stimulant is the UK Government’s recently-introduced Help To Buy scheme (HTB). When announced by Chancellor George Osborne last year it was seen as a state guarantee scheme which ensured banks would lend to first-time buyers and others who were struggling to find funds for a deposit.
This week, the evidence was either half full or half empty, depending on whether you see the HTB as vital to the property market or an expensive folly. The data suggested that only 1.3% of recent mortgage lending by value was through HTB. Some 300,000 families are believed to have benefited. So if anything it could be criticised that the scheme has not been big enough a success and therefore had too little desired impact.
The Bank of England is nervous about HTB because a temporary scheme could become a regular fixture, distorting the housing market and fueling inflation, concerns some of which were raised by me in an earlier blog a year ago.
And just because the government has a stake in Lloyds Bank and RBS does not mean that the Chancellor has much of a say. Last month, Lloyds Bank, soon to be privatised, took the decision to restrict “risky” housing loans of GBP500,000 in order to cool the London market, an act some believe RBS could also adopt.
COOLING OFF PERIOD
But already the vice is clamping down on the UK housing market. The Bank of England deputy governor Charlie Bean warned last month that UK interest rates could scale 3% over the next three to five years. Given the 300-year historic lows of 50 basis points currently, that represents a huge 250 bps jump for households who have become unhealthily accustomed to artificially-low interest rates on their mortgages.
That has begun to manifest in the direction of house prices already. This week, major mortgage lender the Nationwide Building Society remarked that property price increases are now slowing. Although average prices have risen by 11% in the 12 months to May, according to the Nationwide, in some cases property websites are already recording a drop of 10% in property prices since February this year. In some places in the inflated South of the UK property prices have already been marked down by desperate sellers by up to 20% on a year ago as buyers bide time and contemplate whether now we are witnessing the peak for prices.
TAX TAKE OPTIONS
Yet it is now that various quarters are seeking to tax property owners more, allowing the government to cash in on the rise in property prices we have seen through the credit crunch years.
UK opposition party Labour has proposed a Mansion Tax on “palaces” worth over GBP2 million, although the architect must have been a 20-year-old researcher who thought it was an unaffordable price platform to base the starting point for the new tax on wealth. Yet in London at least even ordinary properties are fast rising towards that level while council flats and houses are already now subject to Inheritance Tax which had been introduced by a Conservative administration in 1986 to target only the really wealthy.
Meanwhile, the Liberal Democrats have watered down their preference for a Mansion Tax starting at GBP2m in favour of more tax bands at the top end of the existing Council Tax system – penalising the super-wealthy the most.
Now, Brussels has begun insisting on a homes tax for Britain. The EU is suggesting Britain introduces the much-criticised Mansion Tax. But the biggest problem is that many affected homeowners would be cash-poor, asset-rich dwellers such as the elderly and forced to sell up. Unless we are saying that elderly people living in a big house is morally wrong in the way that we tax liquor drinkers or smokers, then we ought not to interfere with people’s living choices. Rather tax should simply reflect decisions people are willing to make in life.
It was staggering to note the comments this week of former City regulator Lord Turner, however. And especially from a former financial regulator. He backed the EU Commission’s proposal saying that it was unfair that he pays less for his Kensington mansion than someone living in a more modest dwelling in northern England.
But Council Tax is not a reflection across the country. It is only meaningfully comparable within an area. Hence, Turner’s comparison should be with someone living in the handful of social housing estates in the privileged Royal Borough of Kensington & Chelsea. It makes no fiscal policy sense to remark that someone in the north of England pays more. Kensington has few pockets of poverty and therefore spends far less on public services that combat such poverty. Meanwhile, a council in the north has a lot more social housing, higher other demands on services, and properties yielding less council tax relative to those in the south of England because of house price differentials. Even with central government support for services they result in higher Council Tax bills for the average property owner in the North. But often this is offset by Council Tax Benefit anyway.
There is no doubt that, even in a falling property market, the government stands to bag tax receipts from a Mansion Tax. So it might be persuaded of some variation on Europe’s demand.
So where does this leave plans to tax bigger houses? That rather depends on who wins the 2015 UK General Election.