Head of Economic Research Adam Memon wrote a double page spread for the Mail on Sunday on Labour's mansion tax plans, Sunday 19 April 2015.
To read the full article, visit Mail Online webpage.
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.
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.
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.
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.
‘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.
To read the full article, visit Mail Online webpage.