As part of urgent efforts to address the UK’s huge budget deficit, the new Cameron-Clegg coalition administration is proposing to increase capital gains tax on all non-business assets from the current 18%, to 40%, and possibly even to 50%. This tax hike will affect shares, second homes, buy-to-let investment properties and collectable assets, and is largely expected to take effect in the tax year beginning April 2011.
Market watchers are warning that the tax hike could lead to a fire-sale of buy-to-let properties, and kill off investment interest in the UK property market for some time. Details of the proposed tax hike will be revealed in the Emergency Budget by June 22, but property agents like Savills are already advising clients who have made good capital gains and are looking to rationalise their property portfolio, to sell their investments before April 2011, to avoid the tax hike.
Estate agents have reportedly received an increased number of calls from buy-to-let landlords looking to divest their property holdings. Many second-home owners and investors will see this as an opportunity to come out of the market for the short term, says James Hyman, of surveyor and property consultant firm Cluttons.
The silver lining to all this, if there is one, is that homebuyers who were priced out of the market might finally find bargains, especially in London, where a chronic supply-demand imbalance has kept prices high. Indeed, Hyman says the tax hike could provide the London market with the supply it has been “crying out for” over the last 18 months.
The flipside is that the tax hike could spur a stampede for the door and create an oversupply in the market that could further drive down prices. In fact, the recent recovery notwithstanding, the UK residential property market remains fragile. Latest figures from the Land Registry show that, while the annual rate of price growth as at March has increased to 7.5%, house prices in England and Wales have slid in the past couple of months by 0.6% in March and 0.3% in February.
London house prices are the exception, of course, thanks to persistent interest from foreign buyers. According to the Land Registry, as at March, annual price growth was running at 13% and prices were up 1.6%, the strongest growth rates in any region in the country. Meanwhile, Knight Frank’s April 2010 Prime Central London Residential Index shows prime property prices in London rose 1.3% in April and are now 21% higher than their post-crash low reached in March 2009.
It isn’t just wealthy Asians who are pushing up London property prices, but Greeks seeking a safe haven from their own country’s financial turmoil too. Some 56% of property priced at £2 million-plus were purchased by international buyers. Still, the higher capital gains tax could make residential property investments across the board become less tradable in the longer term, notes Lucian Cook, director of Savills Residential Research.
Even for property investors looking for long-term rental yields rather than short-term capital appreciation, the outlook for the UK real estate market isn’t great. With mortgage lenders still in financial straits, it’s tough to get financing to buy property.
The Council of Mortgage Lenders recently reported that mortgage lending in April had declined 12% to £10.2 billion (S$20.7 billion) from the previous month, making it the lowest April total since 2000 and almost unchanged from a year earlier. The CML says it expects credit availability to remain restricted for some time. That’s despite the surge in higher loan-to-value product offerings in the market in recent months.
Things might soon get worse on the mortgage lending front as the government addresses its budget deficit and withdraws various support schemes from next year. Then, there is the eurozone financial crisis, which could create another credit crunch. Already, the “finance famine” has sharply increased the number of unsold stock, placing downward pressure on prices.
The May edition of property agents Rightmove.co.uk’s House Price Index, which tracks the asking prices of residential property, shows that the annual rate of increase of asking prices is down from 6% to 4.3%, while overall asking prices rose 0.7% in May, compared with 2.6% in April.
Rightmove’s commercial director Miles Shipside describes this as the “broken” housing market that will pose a tough challenge for the new coalition government — and also for property investors already in the UK property market.
Lim Yin Foong was editor of Personal Money, a Malaysian personal finance magazine published by The Edge Communications, from 2001 to 2006. She is now based in the UK.This article first appeared in the May 31 issue of The Edge Singapore.
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