Opinion: The raging south east property boom must be stopped, without harming the rest of the UK

Vince Cable speaking on the BBC’s Andrew Marr show today warned of a ‘raging housing boom’ in the South East where large parts of London could end up inhabited by only ‘foreigners and bankers’ (boroughs such as Camden, Haringey, Hammersmith and Fulham already have an average house price to earnings ratio of over 11).

One solution would be to raise interest rates making borrowing less affordable. But as Vince said today:
“The danger of raising interest rates is that you hit those parts of the country which are not yet fully recovered, you push up the exchange rate and that hits manufacturing. We don’t want that.”

We need policies that surgically focus on the housing market and don’t risk our fragile recovery. The classical solution to an asset bubble is to tax the ‘super normal’ profits being earned on these assets, not only capturing some of this profit for the government to spend on public works, but also sending a clear signal to investors that profiteering at this level will not be tolerated.

The coalition’s recent announcement to impose capital gains tax on foreign property investors is a welcome move, but we must go further and tax the capital gains from house sales on ALL properties sold in the UK. Most house sales qualify for tax relief if the house is someone’s primary residence, scrapping this tax break would send a clear message that homes are for living in and profits from selling your home will be taxed like any other asset. Furthermore the tax could be levied only on excessive gains that are damaging to society. We could say as the Institute Of Chartered Surveyors said recently that yearly price rises of 5% are acceptable, but any gains over that amount should be subject to capital gains tax.

Any money raised locally by this tax could be given to the local authority where the house was sold to build new social housing, thus increasing the supply of property in that area during periods of high demand.

Of course there are many other proposals for taxing an overheating housing market, the economics students’ favourite the Land Value Tax being one of them. But this system of valuing land would be cumbersome to implement and open to endless appeals. The data to calculate capital gains is complete, accurate and publicly available at the land registry and the tax could be paid during the transaction of the house sale, much as Stamp Duty is today. Stamp Duty itself could be scrapped, an unjust tax dating back to the 1700’s that levies a cost on those that can least afford it, first time buyers.

If we are going to tackle the London housing bubble we need bold, well designed polices that will tackle the problem without damaging the general economy, or we risk creating a ‘2 speed’ Britain which is as difficult to manage economically as it is unfair to those living outside the South East of England.

* Gareth Wilson is a Videogame Director turned Liberal Democrat activist who blogs here

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  • Wouldn’t this penalise people who move up the property ladder though? While I understand this is aimed at investors specifically, what about the family who need to move into a bigger house as they have more children? If they’ve made a profit on their existing home should they not be entitled to keep it in order to help them by the larger property?

  • One of the obvious problems involve investors with capital, adding rental properties to their portfolio, and outbidding those couples who are simply looking for a house to buy and live in.
    So why not scrap Stamp Duty and replace it with a Rental Premium Tax.? So that at the point of a house sale, if the person buying intends to live there, they pay no tax, whereas if the purchaser is not intending to use that property as their primary residence they pay a (say), 5% tax on the sale price. This would assist in putting a lid on the outbidding by capital rich investors in the rental market, and also those purchasing Cumbrian and Cornwall holiday/second homes, and thus give younger couples a ‘look in’, on buying a home for themselves.

  • Would taxing capital gains on people’s primary residences not create a huge illiquidity in the market though? By requiring movers to raise additional funds to cover this tax a a huge brake would surely be put on the market, and with it labour market flexibility.

    I’m pleased to see new ideas, but I’m not sure what this offers over a combined policy of land value taxation (admittedly not trivial but far more benign in its impact) and increased construction.

    (An aside, but I’d much rather the money going towards infrastructure around SE England went instead to encouraging job creation in regions with spare capacity.)

  • “we must go further and tax the capital gains from house sales on ALL properties sold in the UK”

    Great, so if I sell my modest two-bedroom flat in a fairly central area of London, I am immediately faced with a crippling tax bill which means I can no longer afford to live in the area I grew up in? How is that supposed to work?

    All these proposals seem to act basically as a tax on living in London. Given that we already pay far, far more tax than we receive in spending, that strikes me as totally unjust, particularly since many of us were born here and don’t see why we should be forced to move out.

    The whole current boom is being driven by London’s attraction as a destination because of its buoyant economy and jobs market, with massive numbers of arrivals of new residents from all over the world, including the EU.

    Agreed we should be taxing gains on second properties, but as for main residences, no way.

  • Max Wilkinson 23rd Dec '13 - 2:01pm

    Isn’t even a 5% rise likely to lead to house prices becoming ever more unaffordable? How often has wage inflation been above that level in recent times?

  • Hi Gregg

    I guess it would depend on level it was set at. It could be brought in at pretty low level (say 5-10% on any gains in value over 5% year on year) so the average bill would be something close to what’s paid by Stamp Duty. Really I was trying to think of a policy that solves these issues for me:

    – Stamp Duty is paid by the people who can afford it least, the buyers, stopping people getting on the housing ladder in the first place. This tax is paid for by those that can afford it most, namely people who have made ‘super normal’ profits on their house.
    – Most people when they sell their house (probably the biggest capital gain they’ll make in their life) attract no tax whatsoever. It seems deeply unfair to me that many people have become asset millionaires simply because of where they bought a house 20 years ago while real incomes are falling across the country
    – This tax is implementable, as unfortunately LVT isn’t – as just doing the valuations themselves is unlikely to happen. How many times has council tax been revalued since it came in?
    – The tax is always payable, as its paid when you sell your house, so wont turf out income poor pensioners in massive houses (always a criticism of wealth taxes)
    – (controversially) I think we need a redistribution of money away from those who own and make profit from housing to those who don’t own a house. Or we’ll end up in 20 years with a 2 class society of those who own their house (or parents owned so have money to help) and those that don’t
    – It will provide funds for new housing in the areas that are overheating, hopefully bringing price rises down in the long term

    RC – Appreciate your point of view, its not a tax on living in London though, its the state taking a proportion of your windfall from your house rocketing up in value. It will never be asked for when you’re skint (unlike new council tax bands, or LVT) and if your house goes down in value and you’re in negative equity you wont pay a penny when you sell your house.

    PS – I do own a house btw in Cheshire that’s going up in value right now so I’d get hit by this tax. I just think its the right thing to do.

  • I think you possibly underestimate the relative ease of implementation of this plan, and also its impact on market liquidity. Still, it’s good to see the options being debated.

    As for the cash-poor pensioner with LVT, surely they could be handle as with the social care reforms – by the government placing a charge on the estate for the tax value.

  • Hi Greg

    I think you’re right, I imagine any policy in this area beyond tinkering is going to be a challenge to implement – there will be winners and losers. I guess that’s why we’ve still got Stamp Duty from 300 years ago! LVT was around when I did my Economics degree in 1998 and to my knowledge its not been truely implemented anywhere in the world so far…

    I’m just trying to think out of the box and try to propose *something* that’s redistributive and directly affects the problem without any unwanted side effects (like interest rate increases). I’ve watched income and wealth disparities widen and widen over the past 20 years and the UK is unrecognisable to the place it was when I was a child. If anyone else has ideas to stop this housing bubble I’m all ears!!

  • @ John Dunn

    That’s an interesting idea. Anything that helps redistribute money earned from housing back to the government for housing and public goods I’d be completely in favour of.

    Its going to be interesting to see how much the addition of capital gains to foreign investors housing purchases will raise.

  • Always worth remembering that any capital gains tax/stamp duty increase arrangement will hit a relatively small minority so won’t annoy enough voters to affect electability.

    Combined with laws prohibiting non-residents/tax exempt from owning property above a certain worth it would take the edge of London without affecting other places significantly.

  • “Appreciate your point of view, its not a tax on living in London though, its the state taking a proportion of your windfall from your house rocketing up in value. It will never be asked for when you’re skint (unlike new council tax bands, or LVT)”

    But if you take a proportion of my money when I simply want to move to a new property in the same area, I now can’t afford that property because you’ve taken my money away. I would therefore be forced to move out.

    This will not work and is totally unfair because the money will predominantly come from Londoners, who are already overtaxed.

    Time to think again, I’m afraid.

  • How will this suggestion deal with the circumstance when a property is extended or modernised? Are you proposing to add capital gains onto VAT for this work? LVT is simpler.

  • It is after all the value of the land which is increasing in London and the South East not the house.

  • RC

    I don’t think I’ll be changing your mind on this, but I’ll try 🙂

    I’d hope that with many people in the market having a bit less money to pay for their next house, price rises overall would slow. In the long run that could mean you saving money for want to trade up – rising house prices help nobody except those looking to downsize. For example in my area I’ve given up ever moving up from my modest terrace as the detached house that was £100K more than mu house 10 years ago is now £200K more. I’ll never be able to afford it. I imagine if things continue the way they are in a few years a bigger house in your area will be unaffordable for you too (if not already).

    Lower price rises will put off investors, their money will go elsewhere again helping dampen demand. Also this money could be used to fund more new housing, again keeping prices down.

  • Graham Martin-Royle 23rd Dec '13 - 4:34pm

    I don’t know if what you’re proposing is the correct answer but I do agree that something has gone wrong with the property market. I was lucky enough to get on the property ladder in the 90’s when prices were low, now I’ve got a property worth a huge amount apparently. I’ve not done anything to improve my circumstances apart from buy a property, why should I suddenly find myself in a situation whereby, if I were to sell, I would have an enormous amount of money at my disposal?

    And because property has gone up so much, first time buyers virtually cannot get onto the market. That cannot be good for either the market, the economy or society as a whole.

  • It would all depend on the state of the market when it was introduced and the time period over which capital gains were measured.

    If introduced at a time when the market was not rising or only rising slowly and capital gains were calculated over a period that excluded previous booms, that might conceivably acceptable.

    But as a device to tackle the current state of affairs where a boom is already underway and property prices are already increasing fast, it would not be in any way acceptable.

    As for your supposition about me not being able to move to the next stage on the property ladder, you’re quite right. But this tax would cost me and many others like me living in modest properties a huge amount of money, so we would not only have scrimped and saved to pay exorbitant prices but we would then be penalised because of the area we live in.

  • Eddie Sammon 23rd Dec '13 - 6:30pm

    ” but we must go further and tax the capital gains from house sales on ALL properties sold in the UK”

    That is a good suggestion. I don’t see why the principle private residence should be exempt.

    However, overall, besides getting rid of Help to Buy, I don’t see the solution being through fiscal solutions. There is too much money around and if we make property less attractive it will just find itself in other investments. The stock market and assets as a whole have been massively inflated over the years.

    I would prefer to start tightening up the money supply and I think this will have the greatest effect on the banks and therefore central London, whilst also hitting the rest of the country. The problem is I don’t think a “have your cake and eat it too” outcome is possible when it comes to bursting the London property bubble and not other parts of the economy too.

    Thanks for the article! Some interesting points and I agree Land Value taxation would be inefficient.

  • Eddie Sammon 23rd Dec '13 - 7:12pm

    I’m not someone who wants another recession, 0.5% interest rates just don’t make sense to me, so I like to counter any claims that we should keep them at the same level.

  • sanbikinoraion 23rd Dec '13 - 8:43pm

    I don’t really understand why some people have this terror of implementing LVT. Switzerland has an asset tax that is effectively an LVT (and then some). We value houses *all the time*, estate agents do it for free on spec of being able to sell the property. The skills and experience are there and correlating against house prices in the same area has been easy for years.

    I would really like an anti-LVT-on-the-grounds-of-difficulty person to describe what is so challenging about it that it can be done in other countries but not this one. It smacks of an excuse and a resistance to engage with the substantive aspects of LVT.

  • Eddie Sammon 23rd Dec '13 - 8:58pm

    San, I don’t like Land value taxation mainly because I don’t see any reason why we should have it when we could just go for a proper net asset tax. It would just penalise people whose wealth is tied up in property and not catch the people who have wealth elsewhere.

  • Graham Evans 23rd Dec '13 - 9:46pm

    The debate over different ways to tax property in order to slow down house price rises is a diversion from the key market driver, demand outstripping supply, particularly in London and the SE. Unless we dramically increase house building to the level of at least 200,000 units per year fiscal approaches will in practice do little to improve the situation. I do actually see a lot of merit in Labour’s idea of building New Towns. I also think we should consider dramatically increasing the size of medium sized towns which have no great architectural or historic merit , such as Ashford in Kent, but putting in government money, perhaps through some sort of local development tax, to ensure the infrastructure is improved at the same rate as the housing development.

  • Stephen Hesketh 24th Dec '13 - 8:37am

    Gareth has written previously regarding the London-centric nature of our economy and the policies of successive governments. I am open to whatever policies we come up with but it is a problem we must tackle. No wonder the Scots have an issue with being governed from as far away from them as you can get in the British Isles. Running the economy for the disproportionate benefit of the city of London has been a disaster for manufacturing industry in the rest of the country and the sale of property in London and the purchase of second homes etc. has forced up house prices in low-wage counties such as Cornwall.
    We seriously need to look at LVT on property owners in the more prosperous areas of London. A gradual phasing out of London-weighting payments and a complete redistribution of such prejudicial subsidies such as the spending on the Arts in London and their rebalancing to national averages. Why on earth should our other regions be subsidising wealthy London?
    Remember the ‘fairer society’ section of the present (awful and not particularly Liberal) party slogan??

  • @ Stephen Hesketh

    “Why on earth should our other regions be subsidising wealthy London?”

    They aren’t. Quite the opposite. People in London are already massively penalised by the tax system as it is, paying hugely more tax than they receive in spending. Why does increasing this injustice make things any better? Increasing our huge tax burden any more is totally unacceptable.

    What we need to be doing is spending the huge sums of money already doled out in the rest of the UK on investment, education and infrastructure rather than on things that merely patch up the consequences of failure like out of work benefits?

  • @ Graham / jedibeeftrix

    Agree wholeheartedly, demand side solutions will only help a little, the real problem is the lack of housing built over the last 20 years. Its Labour’s biggest failure. I find it interesting they talk about a ‘cost of living crisis’ when they presided over a period where the cost of an average house went from around 3 times average earnings, all the way up to 6.5 times average earnings just before the crash, effectively doubling housing costs..

    Although the recent evidence shows we’re not doing much better with only 107,000 new homes built when we need many more just to stand still. there’s good article on the Channel 4 if anyone’s interested http://blogs.channel4.com/faisal-islam-on-economics/official-years-terrible-housebuilding-stats/19883

    But what to do in places like London where there’s simply nowhere else to build? Demand side taxation of whatever means at least will capture some of this money for public goods, which is bettern than doing nothing.

    @ sanbikinoraion
    As a former Economics student I love the principles of LVT, but I’d be amazed if we can get it to work mainly due to the valuation process. If you look at the closest we’ve got to it (council tax) to my knowledge there’s been no revaluation in England since they came in 1993 (I think they did in Wales at some point). For LVT to work we’d need a system the revalues regularly and fairly. Not impossible in this day and age, but seeing how terrible we’ve been with revaluing council tax I doubt we’d be much better with LVT. Capital gains would need no government valuation and would be ‘fair’ as the tax would be determined by current market value.

  • Eddie Sammon 24th Dec '13 - 2:31pm

    I’ve long felt that the UK parliament shouldn’t be in London, but I doubt the will to make the big structural changes is there.

    We don’t need to have an economy with a big powerhouse in the South East, it has its pros, but I think the cons outweigh the pros. London is becoming a shanty town.

  • >where large parts of London could end up inhabited by only ‘foreigners and bankers’
    This statement shows just how much out of touch Vince is!

    Currently (and for many years) there are parts of London inhabited largely by ‘foreigners’ who actually live here. Additionally, according to reports much of the recent purchasing by ‘foreigners’ has been as investments and hence not to be regularly inhabited (by the ‘foreigner’) but either to be used as a second home or to be rented.

    Given that financial services is a major ‘industry’ in modern London, I would expect many inhabitants to be ‘bankers’; as many people prefer to live near to their place of daily work.

  • >The coalition’s recent announcement to impose capital gains tax on foreign property investors is a welcome move, but we must go further and tax the capital gains from house sales on ALL properties sold in the UK.

    No this is daft in two respects!

    Firstly, the need is not to discourage sale but to discourage purchase by foreign property investors! (Remember we desperately need new houses for UK residents to live in). Therefore what is needed is to impose taxes up front on foreign investors to make the investment less appealing. As a foreign investor by definition is not purchasing their primary home, it is right that they should pay (20%) VAT/Stamp Duty on a luxury purchase, regardless of the age of the property purchased.

    Secondly, taxing capital gains will in reality have little real effect on property prices, in fact it will probably stop the market because, why would someone sell if it means they incur a substantial tax bill? In fact a capital gains tax, plays into property being owned by (off-shore) corporate entities rather than individuals (easier to avoid tax and to hand property down the generations); hence more people living in rented accommodation…

  • @Graham Martin-Royle 23rd Dec ’13 – 4:34pm
    ” I was lucky enough to get on the property ladder in the 90′s when prices were low, now I’ve got a property worth a huge amount apparently. I’ve not done anything to improve my circumstances apart from buy a property, why should I suddenly find myself in a situation whereby, if I were to sell, I would have an enormous amount of money at my disposal?”

    I suggest you try and buy another property in your area (ie. downsize) then you will see that your property hasn’t really appreciated to the extent you think it has. The only way you can cash in on the perceived increase in value is to move out to a low cost area – but then that option was available to you back in the 90’s…

  • Graham Evans 24th Dec '13 - 7:58pm

    @Gareth Wilson
    It really isn’t the case that there is nowhere to build in London, by which I mean Greater London. There are still plenty of opportunities in many of the outer London boroughs, as the dockland and Olympic Park areas demonstrate. Similarly, there are still many areas of the SE which have been designated as green belt, but whose amenity value is pretty minimal, other than prevent the coalescence of exiting small towns and villages. However, there is a strong case for arguing that larger towns with good infrastructure and internal transport links is a much better approach to living that having people commute from throughout the home counties into central London.

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