Taxing speculation in the housing market
In parallel to the much discussed idea of capping house price inflation (or at least the Bank of England setting it as a policy goal and then trying to lean on the banks), there has been much concern raised about foreign investment, viewed as largely speculative, in the London market (though not just there). Some commentators have suggested we might learn from speculation taxes employed in property markets elsewhere. Andrew Heywood and Paul Hackett have accordingly published a thought-provoking discussion paper for the Smith Institute, which express these issues further (the case for a property speculation tax) (1).
Their argument is as follows. Overseas buyers are investing something like £7 billon in London’s market, the same as 2/5 of all mortgage loans made in the capital, 38% of resales and 85% of new build in central London. A property speculation tax would, they argue, be a helpful additional policy lever to dampen speculation. They envisage a new tax drawing on the features of similar provisions in Germany – essentially a high tax is imposed on sellers who seek capital gain quickly after purchase with the tax rate tapering down over time i.e. it might be set at a maximum rate (they suggest 20-30% of capital gain) for sales within two years and then fall to zero over a period of say 10 years.
To be clear, this would exclude home-owners (i.e. owners of principal residences) and long term investors would also escape it but the tax could be aimed at second homes, empty property and the like. The primary target would be short-term investors, domestic and foreign, who have only short term capital growth speculative motivations.
The authors say this is not like the mansion tax – it is aimed at speculation rather than wealth redistribution and it might replace or add to existing capital gains tax provision on property (outwith primary residences of owner-occupiers). They believe that HMRC could readily collect it (immovable property is a good tax base of course from a collection point of view) and they make something of a case for regionally varying the tax.
It is an interesting paper. It sits somewhere between trying to float the idea, recognizing some of the possible shortcomings and providing a call for further debate in this general direction. A number of points strike me.
First, we already have a tax on second properties namely the council tax and my admittedly dim recollection was that it was set slightly punitively compared to occupied levels of tax (but I may be out of date). There would be a need, over and above mansion tax debates, about synchronizing the local tax with this proposed tax on speculation.
Second, the authors are balanced in their reporting of the experience of these sorts of taxes elsewhere an in particular the less effective role they played in Asian markets like Taiwan. However, the German example is much more conducive to their case. They recognise and we must also, however, that policy transfer from one type of housing system to another is a complex business that requires a lot of study to avoid it going wrong (see the excellent new book by King and Crewe – ‘The blunders of our governments’ published by Oneworld – to see some painful illustrations from recent public policy).
Third, I am actually less convinced about keeping the tax regionally varied. I would have thought that through the alchemy of financial leverage there is as much speculative gain to be made in low value property markets as there is in the high end of London ‘s stratospheric prices. This is still dysfunctional just not in quite so dramatic a fashion.
Fourth, I think there is clearly quite a bit of modeling work to be done on the revenue and displacement effects that different versions of such a tax might have on both capital gains tax revenues (if it partially or wholly replaced that function) but also in terms of its revenues in relation to costs of collecting and setting up. I would imagine it can piggy back on stamp duty – though that will be complicated in Scotland after it is replaced with a new transactions tax in 2015.
The harder question to answer is how it will affect behavior – the second round effects. Heywood and Hackett note that most of this speculative activity is broadly associated with: American and North American investors seeking property in London for residential or investment purposes, non-OECD investors seeking save havens and otherwise secure property in a world city (though often hardly if at all living there); and Asian investors who seek both capital and income returns. These groups will respond differently to such a property speculation tax. And just how would it affect the buy to let sector?
It would change the incentives for second home owners and owners of otherwise empty property – but while it may stop buying to keep empty it will not help or incentivise those already holding such property other than to hold on longer and perhaps seek income returns from a tenant- but it will depend on the motivations of such investors.
A speculation tax may have a modest but helpful impact reducing these pressures. Depending on how it is designed it may be a valuable fiscal tool to add to the largely monetary policy levers open to market stability and the other levers that might support sustained increases in housing supply. There are clearly many questions and trade-offs attached to design and consequences of the tax. However, I would not see it as a revenue-raising device but more as a tool to lessen speculative pressures. I am not so keen on the London only focus (though the authors do say that they think that the argument is finely balanced). It does need to cover its costs but it sounds like it would be relatively simple and cheap to administer. I also cannot imagine it would be that hard a sell politically in the current environment.
There are many practical hurdles and design questions to overcome but it is definitely worth further consideration as part of a broader package.
(1) Haywood, A and Hackett, P (2013) ‘The Case for a Property Speculation Tax’. A Smith Institute Discussion Paper. http://www.smith-institute.org.uk/