Red Ed's Mansion Tax meltdown: Top economist warns Labour's money-spinning policy means millions of ordinary home-owners will suffer due to new wave of house-price volatility
04-20-2015
- Delusion is that it would only affect greedy speculators and the super-rich
- But the reality is Labour’s policy will shake the housing market to its core
- Ordinary home-owners will suffer, either by having to pay thousands extra in tax or due to house-price volatility
- History shows relatively minor tinkering with complex economic market can cause far-reaching shocks
By Adam Memon, Head Of Economic Research At The Centre For Policy Studies
A dangerous complacency has gripped Britain over Labour’s proposed mansion tax. The comfortable delusion is that it would only affect greedy speculators and the super-rich.
But the unfortunate reality is that Labour’s policy will shake the housing market to its core – and that millions of ordinary home-owners will suffer, either by having to pay thousands of pounds extra in tax or by being subjected to a new wave of house-price volatility.
Despite the setbacks caused by the global financial crisis, many in Britain have become used to the idea that the value of their homes will always go up. But history shows us that relatively minor tinkering with what is a complex economic market can cause far-reaching shocks that bring misery to millions.
This five-bedroom £2million-plus property in Queen's Park would be subjected to Labour's proposed mansion tax - and would see its value drop by 10% in two years
Remember the short-lived boom and subsequent bust when Nigel Lawson abolished multiple tax relief on mortgages in 1988? On the face of it, a trifling measure that affected relatively few buyers.
Labour’s promise of a new tax on homes has the potential to distort the market in a far more dramatic fashion.
The most obvious result will be the near-instant creation of tax-blighted ‘dead zones’ affecting properties above and just below the £2 million threshold, where the tax kicks in.
Even worse is the double-whammy attack on home ownership. Prices would collapse at the top end, but increased competition for houses just below the threshold will make what in London terms are middle-class family houses more expensive – hitting exactly the sort of aspirational home-owners Labour says it wants to help.
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In truth, many of these larger houses in London and the South East are not mansions, but relatively large family homes that may have been bought 15 or 20 years ago for little more than the price of a small flat today.
They say that for properties worth up to £3 million, home-owners will be faced with an annual £3,000 tax bill – an enormous amount for pensioners and those on relatively small incomes who may be asset-rich, but cash-poor.
They will be left in an invidious position: their homes will be difficult to sell because people will be put off by the new annual tax – and fears that it may rise still further.
In turn, the market would be crippled in high-end houses, like this four-bedroom home in Chiswick, west London
Given the uncertainty over the valuations of property and concerns over whether more properties might get sucked into the tax at a later date, it is likely that the freeze will reach well below the £2 million threshold – and may even blight sales down to £1.75 million.
With buyers scarce, prices will tumble. For properties above and just below the threshold, an average fall in prices of more than five per cent seems likely.
A much more severe fall in prices of up to ten per cent is possible. Ultimately this means that families could see hundreds of thousands of pounds wiped off the value of their homes.
But the effect will not end there. With fewer people wanting to move up the property ladder because they would be whacked by the tax if their new home was above the threshold, competition for houses below the threshold will intensify.
Given that there is already a shortage of such houses, this can only mean that prices will be driven up, possibly by as much as ten per cent, pricing out many middle-class families. So the perverse consequence would be that the squeezed middle will be squeezed even more.
And there is equally bad news for those at the bottom of the housing ladder, in the South East and further afield. Labour has also suggested rolling back on support for first-time buyers. For example, the party’s proposal to restrict Help to Buy ISAs would limit the support for aspiring home-owners and could even kill off the entire policy.
The result would be a flattening of the market at the bottom end, creating an even larger price difference between starter homes and family homes. For many, this would mean the prospect of owning a comfortable home will become ever more distant – hardly the revolution that Labour preaches.
But don’t just take it from me, an economics analyst. Here’s what the professionals have to say. Trevor Abrahmsohn, of Glentree International, which sells some of north London’s most expensive properties, says: ‘People who think they won’t be affected by the mansion tax are wrong. What happens at the top of the market filters down to the bottom. It will affect everybody.
Family homes, including this three-bedroom property in Walthamstow, north London, would see a huge hike
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‘We call the mansion tax the Black Death. It is about getting the two Eds into power and it won’t raise the money Labour thinks it will. The wealthy are able simply to rent, or to move their assets abroad. I also believe it is entirely possible the taxable level will be lowered to, say, £1 million.’
Becky Fatemi, managing director of London estate agent Rokstone, says: ‘The Labour Party will see a huge negative domino effect from abolishing non-dom status and introducing the mansion tax. Surely France is a perfect textbook for what happens if you start bashing and bullying the super-rich – all they do is up and leave.’
And Peter Wetherell, of Wetherell estate agents, says the Election will be followed by a huge adjustment to the housing market. ‘If the mansion tax is applied,’ he says, ‘it could have a very severe impact indeed.
‘A much fairer way would be to have adjusted bands for council tax across the country. You can have someone living in a small two-bedroom flat in London who will end up paying the tax, yet a richer family in a mansion in Cheshire not paying, because they fall just under the threshold. Again this is unjust.’
But it’s not only home-owners who will suffer. The collapse in high-value sales will cause a loss of tax taken by the State and affect regions far beyond the London and the South East. A property sold at £2.5 million generates about £215,000 in stamp duty – enough to pay the starting salaries of ten nurses.
And it’s not as if the proposed mansion tax is economically coherent. Labour thinks it can raise £1.2 billion straight away from the mansion tax if it gets into Government. This is hopelessly optimistic. Implementing this tax would provoke a series of costly new disputes between the Government and home-owners over property valuations. While this might be great for surveyors, it would not be so great for home-owners faced with extra bills, wasted time and stress.
“Millions will be worse off through the scheme ”
Detailed surveys can cost around £2,000 and there are tens of thousands of homes which could be dragged into the tax depending on the individual assessments. In practice, passing this tax into law, establishing and implementing the valuation mechanism and dealing with appeals could drag out over years, leaving a massive hole in public finances.
Labour’s estimate of how much tax the owners of larger or well-placed homes will have to pay is also wide of the mark. Given that there are only about 100,000 homes worth £2 million or more, the average extra tax bill will have to be at least £12,000 per property if Labour wants to reach its revenue target.
This is much higher than the figures it is currently talking about and it would also disproportionately impact home-owners in London and the South East who would pay 95 per cent of mansion tax revenue.
There are other crucial mistakes in Labour’s costings. The slump in top-end prices that their policy will produce will lead to lower stamp duty and inheritance tax revenues. This would result in £1 in every £6 raised by the mansion tax being lost elsewhere.
First-time buyers would end up trapped at the bottom of the property ladder as properties, such as this two-bedroom flat in Wembley, north London, would see very little increase in value
This is to say nothing of the reduction in revenues coming from the broader economic damage. Say, for example, you are a wealthy foreigner looking to bring jobs and investment to Britain. You may think twice if you find out you have to pay £1,000 a month extra just for living in an expensive property.
Some will still come to Britain; others won’t. The question is, why take the risk of deterring foreign investment at all? Not only does it mean jobs going abroad, but the tax take will suffer too. Just 1.6 per cent of families pay almost half of all stamp duty. Even losing a small proportion of those taxpayers would mean losing significant revenues which undermines the whole case for a mansion tax in the first place.
So it is not likely that the threshold will stay at £2 million for long if Labour is serious about achieving its revenue target. Middle-class home-owners with houses worth much less, perhaps even £1 million or £750,000, will face a brutal awakening to the fact that they may soon have to pay the tax.
Many of these people are on middle incomes and it is worth pointing out that £750,000 wouldn’t even buy a terrace house in most parts of central London – although plenty of other hotspots including parts of Oxford, Cheshire, the Cotswolds and prime coastal locations would also be affected. If the threshold is set that low, we can expect carnage in the housing market as millions of people are brought into the tax.
“The squeezed middle will be squeezed more ”
A sharp drop in prices can be expected as people scramble to sell their houses in the rush to escape the tax – which could be around £2,000 per year. This would make a massive ‘dead zone’ in the housing market spreading well above and below the threshold.
And you can forget about Labour lifting the threshold to levels where it could only affect the super-wealthy. If the threshold is set higher, at say £10 million, then the annual tax charge could be an eye-watering £200,000 a year – an impossibly high figure. The prices of the affected properties could fall by 20 per cent which would be devastating for the top end of the housing market and completely self-defeating.
Even as it stands, Labour’s mansion tax policy fails hopelessly in terms of social justice. A third of the properties in London above the current £2 million threshold have been in the same ownership for more than ten years.
The unfortunate reality is that Labour’s policy will shake the housing market to its core – and that millions of ordinary home-owners will suffer as a result
Homes have increased in value over a long period of time, but many of the owners will be living on modest incomes or a pension. Being faced with a tax bill of thousands of pounds would create a distress that they have done nothing to deserve.
To mitigate this obvious unfairness, Labour has suggested allowing those earning below £42,000 a year the chance to defer payment of the tax. Yet that could lead to some bizarre outcomes. People earning £50,000 a year and lucky enough to be living in a high-value property would have a strong incentive to reduce their earnings below £42,000 – the economics of the madhouse that serves only to reduce wealth creation.
If social justice, rather than pandering to class envy, is truly Labour’s motivation, then the mansion tax is a stunningly nonsensical way of going about it. Millions of people would be made worse off through the higher tax burden and damage to the market.
“Mansion tax would be a hammer blow to aspiration and opportunity with millions of people suffering the consequences ”
Furthermore, it does nothing to tackle the real problem in the housing market – an acute undersupply of new properties. In fact, Labour’s mansion tax would exacerbate this problem.
Much greater uncertainty in the market would surely make developers hold back on plans for expansion. Even if they did want to build, then the banks who rely on houses to be a safe, reliable asset might lose their nerve and cut back on lending. Young people and first-time buyers would be the losers.
There are simpler and safer alternatives. If Labour simply wanted to raise more revenue from property, it could easily introduce new council tax bands. But aren’t British home-owners taxed enough already?
Taxes on property in Britain are higher than every other country in the Organisation for Economic Co-operation and Development (OECD) group of developed nations. We Britons currently pay 4.1 per cent of GDP on property taxes, compared to the OECD average of 1.8 per cent. In Germany it is 0.9 per cent and in high-tax France, it is 3.8 per cent.
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In addition, the current Government has already carried out reforms to stamp duty which have cut the tax burden for cheaper properties and increased the tax take from more expensive properties. These reforms, as well as the Annual Tax on Enveloped Dwellings – paid on properties owned by companies, rather than individuals – have removed the need to raise yet more revenue from residential property.
It is time to end the deception. The introduction of the mansion tax would be a hammer blow to aspiration and opportunity with millions of people suffering the consequences.
When home-owners wake up on May 8, they should brace themselves because life could be about to change very quickly.
All properties featured are on sale in London, which would be hit hardest by a mansion tax. 2016 projections based on prices rising on average four per cent a year, according to mortgage brokers John Charcol. Post mansion tax estimates (which are compared to 2016 figures) are the author's own.