General election set to slow UK prime property market
According to international real estate adviser Savills in its five year forecast report a mansion tax could negatively impact five year growth by an average of 5%.
The high value prime markets, that is the top five to 10% of homes by value, have already been impacted by increased stamp duty, the introduction of an annual tax on enveloped dwellings (ATED) and the closure of certain tax loopholes.
The rate of price growth has begun to slow, particularly in London. After five and half years of price growth and having absorbed a number of tax rises, London looks fully valued, particularly given the uncertainties surrounding the mansion tax as election year approaches.
On this basis, Savills has issued two forecast scenarios: a central scenario and a second based on its estimates of the number of properties in different price bands over £2 million and the scale of possible mansion tax charges given current Labour party proposals.
“Two out of the main political parties still favour some form of mansion tax so owners and buyers will be rightly factoring it into their decisions as the election approaches,” said Sophie Chick, senior research analyst as Savills.
‘It would take some time for the markets to accurately price in the impact of a mansion tax, but the threat of it has already slowed the market. If it becomes clear that a mansion tax is to be introduced after May 2015, we would expect an immediate price adjustment before the market more rationally finds its level,’ she added.
Without a mansion tax the Savills central forecast would see average prime UK house prices slipping 0.5% in 2015, assuming no further increases in the taxation of high value properties. Growth would be expected to resume post election, averaging 22.7% over the next five years across all prime London markets.
Regionally, the recovery is yet to become fully established and the market has capacity for price growth to continue through next year, albeit averaging just 1%, the report says. Five year growth is forecast to average 23.9% across the UK, outperforming prime London, with prime commuter and lead city locations expected to show the strongest growth.
Savills believes that a mansion tax, if implemented in the form most recently discussed, would trigger average price falls of 5% across prime London in 2015 and a fall of 3% across the prime regions.
In a worst case scenario, the value of prime London properties over £10m could fall by 10% and homes worth over £3m regionally would fall 7%. Homes below the mansion tax threshold would not escape its effect, but the proposed progressive structure of the tax would limit the trickledown effect, with small falls of 2% anticipated.
By 2017, the top end of the market would absorb the tax change. The £1m to £2m end of the market would see less of a rally, being more affected by mortgage regulation and expected interest rate rises, similarly the £2m to £3m market remains impacted by the top rate of stamp duty.
“The prime market already accounts for a disproportionately high share of the total tax take, with £2m plus sales accounting for just 0.3% of the housing market, but generating over £1bn in stamp duty,” said Lucian Cook, head of UK residential research at Savills.
Tax receipts for two central London boroughs generate £54m more in stamp duty than the combined total for Scotland, Wales, Northern Ireland, the North East, North West and Yorkshire and the Humber.
“We would favour a revision of the council tax system. This would be more equitable, without the potential unintended consequence of punishing owners of lower value homes, or those who are equity rich but cash poor,” added Cook.
The latest statements of intent on the mansion tax have come from Labour, who would hope to raise £1.2bn. They favour a progressive tax, with properties valued between £2m and £3m paying £3,000 per year, with higher value homes contributing significantly more.
Savills estimates that there are some 97,000 homes worth over £2m in the UK, of which some 40,000 are worth between £2m and £3m, and a further 30,000 between £3m to £5m. To raise £1.2 million, and allowing for tax leakage from stamp duty and inheritance tax as values fall, the charge for homes worth between £3m to £5m could be in the order of £7,000 a year, rising to £125,000 for the estimated 1,500 properties worth over £20m.