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The latest Budget announced by Finance Minister George Osbourne on 8 July was very much a mixed bag for affluent individuals, with the usual tinkering joined by a couple of policies that are being described as bold.
My first reaction to the Budget is that the Right to Buy policy is ill-thought-out, not least because it is predicated on effectively selling tax-payer assets on the cheap.
Meanwhile, my view is that the Help To Buy ISA initiative is not particularly smart from an economic perspective, but will probably help to buy a few votes. In reality it seems likely to help a few people get onto the property ladder, but also to push prices up at the bottom end. How then will the next generation of buyers get onto the ladder, we might ask? Basically these are headline-grabbing policies which will garner a few votes, but are ultimately tinkering at the edges.In contrast, the changes to the non-dom rules will have sent a shiver down the spine of many people with property interests in London. However, since the changes will not be phased in until 2017, those who may be affected have plenty of time to organise their affairs optimally (giving rise to some very happy tax advisers in the coming months, no doubt).
Furthermore, I expect that the changes will only affect a relatively small number of non-doms. It is worth remembering that while there are an estimated 114,000 non-doms in the UK, only about 30,000 of these are regarded as high net worth individuals. For example, foreign nurses can have non-dom status. How many of the 30,000 HNWIs will be affected by the changes remains to be seen, but I don’t expect this to be serious headwind for London property prices. The UK non-dom regime will remain very attractive, in my view.
In fact, the changes Mr Osborne has suggested seem pretty sensible and it is nice to see a government use a laser to refine what is an otherwise solid piece of legislation rather than their preferred instrument – the wrecking ball.
A Blow to Buy-to-Let Investors?
The biggest Budget surprise, however, was the change to mortgage relief for buy-to-let investors. This certainly helps to level the playing field for first-time buyers, but I am sure that this will cause serious problems for those investors who are overleveraged.
Fortunately, the government will also wait until 2017 to introduce these changes so those who have overstretched themselves will have time to unwind their positions – if they take an honest look at where they stand without delay. Of course, an unintended consequence of this policy may be that landlords simply decide to increase the rent to make up for the shortfall. This will certainly be a realistic option for many as the economy improves and consequently I don’t expect this policy to have a negative effect on property prices on the whole.
However, many large developers will be worried, especially those who have been targeting overseas investors as their main source of buyers. The cumulative effect of introducing Capital Gains Tax for international buyers, higher Stamp Duty and this new policy which will be perceived as “an attack on investors” means that deteriorating sales figures will continue, in my view. I have been advising my clients for the last 18 months to avoid high-density, new-build developments as I see a high probability of price falls.
So, on the face of it the Budget does not seem particularly helpful or disastrous for the London property market. However, this doesn’t tell the whole story. For all the headline grabbing noise of non-doms and levelling the playing field for first time buyers – this is pretty small fry.
In fact, the most important announcement for London and UK property prices does not appear in the housing section of the Budget.
No, the key point is the news that corporation tax will be reduced to 19% and then to 18% by 2020 – the lowest rate in Europe apparently and one which is likely to attract a vast amount of investment from international businesses.
This can only have an upward effect on land prices, which in turn will feed into higher house prices. This inflow of money will dwarf any outflows caused by the changes to the non-dom legislation and mortgage tax relief, in my opinion.
The UK economy is already outperforming, so this should increase momentum which in turn will lead to greater credit generation in time.
Investors should remember that house prices have been going up while the amount of mortgage debt has been going down. This is a positive signal, although the effect of Stamp Duty Land Tax increases should not be underestimated at the top end of the market.
In addition, the expected inflow of pension money has yet to really take place. When it does, this will boost prices at the lower end of the market, so expect to see it outperform over the next couple of years as retirees seek to put their pension pots to work in what remains (for now at least) a persistently low-yield investment environment.
In conclusion, there are myriad factors lending support to property prices at present, with the latest Budget announcements actually proving far friendlier to non-doms and international investors than it perhaps would first appear.
That said, it was hard to deny a sense of déjà vu as Mr Osbourne triumphantly declared, “We have turned a corner and left the age of irresponsibility behind!” Unfortunately, he forgot to add “For now”. The property cycle is following its natural course and in time we can be sure that credit terms will be relaxed as the old lessons are forgotten. This will boost prices and lead to the next great property bubble – setting the scene for an ensuing crash that could well make the last one look like a tea party.
For now, however, property investors can probably relax. I see trouble coming up fast for many new-build developments, but we are a few years away from the property bubble bursting just yet.
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