Wednesday, 28 December 2011

London, tax haven of the year 2011

Despite a totally stagnant housing market across most of the UK, Savilles estate agents have reported that top-end London property prices have increased 18.6% in 2011. This increase is ascribed to international buyers sinking money into UK real-estate as a tax-efficient safe-haven while other investments look increasingly volatile. By assigning property to an off-shore company, it can exchange hands via the sale of shares rather than deeds. So rather than the usual top rate of 5% stamp duty land tax, only 0.5% stamp duty is paid. It goes further than this though, by exchanging equity in an offshore holding company, capital-gains and inheritance tax can also be avoided, as can tax on rental income if the property were to be let. To add insult to injury to the UK taxpayer, many of these super expensive properties are left empty much of the time. They are purchased as a secure store of wealth rather than a residence. So despite seeing the majority of the London workers being forced to pay an increasing proportion of their income for  housing, the most desirable residential locations are becoming increasingly under-utilised.

In fact the only tax that is likely to be paid consistently on property purchased in this way is council tax. However if these properties are left long-term empty then a 50% discount is available for 6 months and 10% discount thereafter. Perhaps in an attempt to lure further foreign buyers to invest, Westminster council proudly proclaims the second lowest council tax in the UK. An apartment in no.1 Hyde Park, valued at £30 million, will pay less in council tax than a 'band C' two bed terrace here in Oxford. Remember that Council tax does not pay for local services but more properties left empty by foreign owners does mean fewer bins for Westminster to collect which is handy for them.

And of course central Government proudly announced that, although they have increased VAT and National Insurance, they would be continuing to freeze council tax this year. Bravo.

Monday, 5 December 2011

"It is hard... to identify asset price bubbles"

A quote from Mervyn King, Governor of the Bank of England, in 2004 agreeing with Alan Greenspan the Chairman of the Federal Reserve. Perhaps he should have looked at the plot below which I put together with data from the Bank of England's website.

The peak in the rate of change of mortgage lending occurred around the same time as the words were being uttered. As far as the central bankers were concerned, since inflation was low and stable, all was fine and dandy. This conclusion was made despite the huge amounts of credit money pouring into real estate. Yet as the financial crisis has developed there has still been no genuine acknowledgement of this failure to spot the critical factor - the change in private debt.

Note the discontinuity in the mortgage lending plot. This occurs where there is a change in the source of the numbers from BoE derived to mortgage lender derived. It is almost as if the BoE want to disown the data.