Small is beautiful if it's a tax rise
Tax cuts and tax rises - they are good indicators of where a property market is at, but can they influence where it is headed? Invariably, finance ministers, like Britain's Chancellor of the Exchequer, raise property taxes (like he has today) when housing markets are strong and cut them when weak.
The British property market maybe weak overall, but its luxury end, the sector for GBP2 million+ homes, on which Chancellor George Osborne will levy stamp duty at 7 per cent from today, has reached record highs in London. This sector will also be affected by his decision to close tax loopholes that allow wealthy foreigners to pay stamp duty at 0.5 per cent when purchasing property via a tax haven.
The Italian government has raised property taxes too. Its retrospective 0.76 per cent annual levy on the market value of homes owned by Italians overseas is effectively a tax on the London housing market, because that is where many Italians buy second homes. Neither the Italian nor the British tax measures are likely to impact significantly on the prime central London housing market. Most overseas buyers will continue to buy London property, because they are doing so for political or extreme wealth preservation reasons - wealthy Middle East businessmen concerned about the Arab Spring, wealthy Greeks and Italians wanting to have assets outside of the crisis-ridden eurozone, Africans looking for a safe haven for their money, Chinese looking to escape autocracy and corruption back home, and Russians looking to avoid punitive taxes which they expect newly elected President Putin to introduce.
If Putin does over-tax his country's rich – and he must be tempted because Moscow's property market is surging, then more of them will move capital abroad – bad news for Moscow vendors and estate agents, but good news for those in London, Paris and other locations favoured by wealthy Russians.
Here's another example of tax increases in one country bolstering property markets in another – newly introduced higher capital gains taxes in France has led to an increase in enquiries for low-taxed Monaco homes. And another example - Chinese money is finding its way overseas via Chinese businesses - the only legitimate way for Chinese to export capital abroad, following property tax rises in China and subsequent price falls – values are forecast to collapse 30 per cent in 2012, more than Beijing would like, so now it is looking to cut taxes again to stabilise the market. Hopefully, it won't be too late, because tax cuts don't always work when other factors like sentiment are overwhelmingly negative - just look at Spain.
Spain's Socialist government cut VAT on new homes from 8 per cent to 4 per cent for six months in 2011, and some developers subsidised the remaining 4 per cent, so that effectively it became 0 per cent for buyers. Madrid's new conservative government has extended the VAT holiday until the end of 2012. The affect on the housing market? Negligible, though some developers around Marbella, where the market is starting revive, say every little helps. In Cyprus, where the market has been troubled since 2007, VAT cuts made in October 2011 have had no tangible affect, though it is still early days of course. These two countries' economic problems are just too great for these tax cuts to make much impact.
So, can tax cuts and rises affect a housing market? Only if they are so large they become more significant than other issues. Increasing stamp duty from 5 per cent to 7 per cent for multi-million pound homes in Britain is not a large tax increase. Still not convinced? The increase in stamp duty from 4 per cent to 5 per cent for GBP1million+ homes, implemented 11 months ago, is now completely forgotten.
Tax cuts and tax rises - they are good indicators of where a property market is at, but can they influence where it is headed? Invariably, finance ministers, like Britain's Chancellor of the Exchequer, raise property taxes (like he has today) when housing markets are strong and cut them when weak.
The British property market maybe weak overall, but its luxury end, the sector for GBP2 million+ homes, on which Chancellor George Osborne will levy stamp duty at 7 per cent from today, has reached record highs in London. This sector will also be affected by his decision to close tax loopholes that allow wealthy foreigners to pay stamp duty at 0.5 per cent when purchasing property via a tax haven.
The Italian government has raised property taxes too. Its retrospective 0.76 per cent annual levy on the market value of homes owned by Italians overseas is effectively a tax on the London housing market, because that is where many Italians buy second homes. Neither the Italian nor the British tax measures are likely to impact significantly on the prime central London housing market. Most overseas buyers will continue to buy London property, because they are doing so for political or extreme wealth preservation reasons - wealthy Middle East businessmen concerned about the Arab Spring, wealthy Greeks and Italians wanting to have assets outside of the crisis-ridden eurozone, Africans looking for a safe haven for their money, Chinese looking to escape autocracy and corruption back home, and Russians looking to avoid punitive taxes which they expect newly elected President Putin to introduce.
If Putin does over-tax his country's rich – and he must be tempted because Moscow's property market is surging, then more of them will move capital abroad – bad news for Moscow vendors and estate agents, but good news for those in London, Paris and other locations favoured by wealthy Russians.
Here's another example of tax increases in one country bolstering property markets in another – newly introduced higher capital gains taxes in France has led to an increase in enquiries for low-taxed Monaco homes. And another example - Chinese money is finding its way overseas via Chinese businesses - the only legitimate way for Chinese to export capital abroad, following property tax rises in China and subsequent price falls – values are forecast to collapse 30 per cent in 2012, more than Beijing would like, so now it is looking to cut taxes again to stabilise the market. Hopefully, it won't be too late, because tax cuts don't always work when other factors like sentiment are overwhelmingly negative - just look at Spain.
Spain's Socialist government cut VAT on new homes from 8 per cent to 4 per cent for six months in 2011, and some developers subsidised the remaining 4 per cent, so that effectively it became 0 per cent for buyers. Madrid's new conservative government has extended the VAT holiday until the end of 2012. The affect on the housing market? Negligible, though some developers around Marbella, where the market is starting revive, say every little helps. In Cyprus, where the market has been troubled since 2007, VAT cuts made in October 2011 have had no tangible affect, though it is still early days of course. These two countries' economic problems are just too great for these tax cuts to make much impact.
So, can tax cuts and rises affect a housing market? Only if they are so large they become more significant than other issues. Increasing stamp duty from 5 per cent to 7 per cent for multi-million pound homes in Britain is not a large tax increase. Still not convinced? The increase in stamp duty from 4 per cent to 5 per cent for GBP1million+ homes, implemented 11 months ago, is now completely forgotten.
Great summary!
ReplyDeleteThank you :)
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