Comment: What is really driving house prices higher?

FEW subjects trigger more feverish commentary than house prices. Barely a year ago there was a widespread conviction that house prices were destined for a crash.

Bill Jamieson
Bill Jamieson
Bill Jamieson

Then the forecast was for a long period of price stagnation. Now the Nationwide has just reported the biggest year-on-year increase in house prices for nearly three years in July, with annual growth hitting 3.9 per cent. Cue much anxiety that we’re heading for another house price bubble. Cries are raised for Capital Gains Tax to be applied to house sales to prevent this incipient bubble getting out of hand.

Recently the Organisation for Economic Co-operation and Development (OECD) argued that Britain should adopt a Continental European-style property tax. Its chief economist Pier Carlo Padoan says chancellor George’s Osborne could stimulate Britain’s economy by scrapping many VAT exemptions – including food, passenger transport and domestic fuel – and abolish council tax and stamp duty in favour of “a property tax based on market values”.

Hide Ad
Hide Ad

This, he adds, would bring greater stability to the property market and also assist in longer term economic recovery by switching more of our savings into productive investment.

A gains tax on all residential homes, not just second homes, could be a colossal money spinner for a debt-strapped government. It could justify such a tax by claiming more resources would be available for social housing and low-cost starter homes. It could soften the blow, as the OECD suggests, by reducing other property taxes such as Stamp Duty.

However, even then it would be a political hard sell. Unlike continental Europe, we do not have a history of taxing assets in this country but opt instead for taxes on income and wealth at death. Home owners would deeply resent an assault on their residential property, bought after decades of mortgage repayments and which in many cases is the single most valuable asset they possess. It would confirm the view of many of the state morphing into a relentless kleptocracy from which nothing is safe.

And they would argue that they are effectively being taxed on illusory gains resulting from inflation, or on the effects of a highly restrictive planning system and on the knock-on effects of the government’s own help-to-buy measures.

However, the proposal is also liable to fall at the first hurdle, on basic considerations of equity. A gains tax on residential property would commit a double offence: first, it would run contrary to the notion of taxing short-term gains hardest by taxing long-term property owners most for years of inflation; and second, by hitting the typical long-term owner-occupier such as the retired and elderly, it would tax those on low or fixed incomes hardest – exactly those who could least afford it and who are currently being hammered by ultra-low interest rates on their savings. Capital Gains Tax as fair? It is hard to conceive a nastier tax.

In any event, there is no such thing as a uniform or “average” house price. And is it equitable that home owners in relatively poor areas should be taxed at the same percentage rate on gains as investment bankers in a 
£2 million-plus prime central London house with its underground swimming pool and ‘chillax’ room?

And as there is no such thing as an average price, do we really have a uniform incipient boom? Prices in Scotland are still some 10 per cent lower than in 2007 before the financial crisis struck. This is very much a patchwork recovery and there are still many areas of the UK where the property market is far from healthy. As for concerns that asking prices “are getting ahead of reality”, have they not always leant in this direction in hot spots until the hard reality of the market brings asking prices nearer to reality?

All this begs a deeper question: why is it that, after only a most modest economic upturn, the squeeze on household incomes and with mortgage lending levels still well below those reached before the banking crisis, there is such an evident upward pressure on prices? What else might be contributing to this?

Hide Ad
Hide Ad

City AM commentator Allister Heath points out that it is not just bad planning policies that are reducing the supply of homes and increasing their cost but also hidden taxes in cash and kind imposed on new building projects.

Local government levies are slapped on to capture “planning gain” by getting developers to pay for social housing, schools and new roads as the price for housing projects. This lumbers the system with hidden costs which inevitably drive up the cost of house building. Fewer homes get built, and those that are will be sold at higher prices.

Better, he says, to abolish the current planning gain tax system and flood the market with new buildable land, thus eliminating super-profits from planning.

As for the charge that developers sit on land with planning permission, this is blind to the simple consideration that developers need to see sales on the first stage of development before they can finance a second. Some developments may also be financially unviable at current prices and costs but would often be worth building were taxes and levies not so high. Others need a land bank to secure a reliable pipeline for future development. In each case, land prices are driven higher by a planning system that has created artificial scarcity.

Finally, there is the perverse knock-on effect of the 20 per cent rate of Value Added Tax on home improvements and extensions. Many home owners would prefer not to move and incur all the extra expense – including Stamp Duty – but to refurbish their existing properties. But the 20 per cent VAT is a real disincentive, especially when new build is VAT-free.

Such taxation works as a barrier to the improvement of our existing housing stock and is wasteful of resources. Taxes on property are surely too high already, without adding Capital Gains Tax to this toxic, problem-multiplying mix.

Twitter: @Bill_Jamieson