THE news that Gordon Brown aims to test his appeal with a general election
next spring has sparked speculation on how the new Prime Minister will seek
to appeal to a group crucial to the outcome of the poll – the 18.5 million
households in Britain that own their homes. Currently there is much focus on
individuals who are unable to clamber onto the property ladder, but Mr Brown
will also wish to show that he is a defender of homeowners’ interests.
A glance at the statistics shows that middle-class households with money in
bricks and mortar have prospered during the Blair years, with residential
property in many areas rising in value by some 200 per cent since 1997. This
outpaces even the strong growth of the stock market during the decade – the
FTSE 100 index of shares in leading companies is up by 145 per cent. Between
1997 and 2007 the average homeowner has seen the equity in his or her
property surge from £29,000 to £103,000.
But as the housing market slows in most locations outside the capital,
attention may be diverted to how Mr Brown, as Chancellor of the Exchequer,
has benefited from house price appreciation. Property taxes in the UK are
some of the highest in the OECD. Stamp duty, in particular, has proved a
bounty. Receipts were £675 million in 1996; last year some £6.3 billion was
collected. Inheritance tax, which is levied at death on the value of
estates, including family homes, has also enriched the Treasury. Inheritance
tax revenues are forecast by the Government to reach £4.1 billion in
2007-08. If the threshold for the payment of inheritance tax had been raised
in line with house price increases, it would now stand at £460,000; instead
it is just £300,000.
It has always been Mr Brown’s habit to take full credit for the healthy state
of the housing market – and for the gains that investors in individual
savings accounts (Isas) have enjoyed. But economists and voters may choose
to view things differently. In Budget after Budget we have heard Gordon
Brown sing the praises of the Government’s policies, pointing to economic
growth, a strong currency and consistently low interest rates, but
commentators say much of the bounty enjoyed by investors over the Blair
decade has been fortuitous. “The drivers of returns have overwhelmingly been
global developments – the rise of new industries, deflation, a world awash
with liquidity and the boom in alternative investments – rather than
domestic policy,” says Jeremy Tigue, manager of the Foreign &
Colonial Investment Trust.
Indeed, domestic policies have had a negative impact on stock market
performance, some experts say. Gavin Davidson, of
thepropertyinvestmentmarket.com, says that the abolition in 1997 of the
dividend tax credit, which took about £5 billion a year from pension
schemes, has pushed investors away from shares and into property. “The
Chancellor’s actions towards pension schemes had a huge impact on the price
of shares and the stock market,” Mr Davidson says. “Many small investors
lost confidence and turned instead to bricks and mortar, fuelling an already
buoyant market.”
As far as property markets are concerned, credit for rising prices goes once
again to global phenomena rather than to any actions of the Government. “The
reason for the fall in interest rates is that bond yields have been falling
for the past ten or 15 years,” says Charlie Ellingworth, marketing director
of the property consultancy Property Vision. “In that environment, you’re
going to get a property boom.”
Brown does deserve kudos, however, commentators say, for giving the Bank of
England its independence. “The decision by Gordon Brown to hand over control
of monetary policy to the Monetary Policy Committee (MPC) was a
fundamentally sound and transformational move,” says Matthew Wyles,
executive director of The Mortgage Works. Next Thursday the MPC meets to
decide whether, as is rumoured, it will yet again increase the base rate;
currently it is 5.5 per cent.
Blair presided over a period of global economic growth, but Brown is taking
over at a less optimistic time. “There are widespread fears that rising
inflation and interest rates could trigger a global slowdown, while some
believe that the recent flurry of private equity takeovers signals the bull
market drawing to a close,” says Justin Modray, of Bestinvest independent
financial advisers.
The outlook for the housing market is arguably even worse. “There are
compelling reasons to suggest that the exceptionally strong ten-year bull
run could be nearing its zenith,” Modray says. “Repossession orders are
rising at a rate not seen since the early 1990s, the ratio of house prices
to earnings has almost doubled in the past ten years, there is upward
pressure on interest rates and residential buy-to-let yields have been
falling.” It is not just growth that is slowing, but also turnover. “We are
in a situation where first-time buyers cannot afford to get on to the
property ladder and people who own homes cannot afford to move,” says
Richard Donnell, the director of research at Hometrack. “The housing market
is in danger of seizing up.”
Another way in which to tackle the log jam in the housing market could be to
use fiscal policy: there is no doubt that many people are deterred from
moving because of the level of stamp duty. “It is a tax on moving,” Mr
Davidson says. “It reduces the supply of property, particularly at the top.”
Gordon Brown has been reluctant to raise thresholds significantly or to
change the way in which the tax is calculated, but Peter Hain, who stood for
the deputy leadership recently, has suggested that stamp duty should be paid
by sellers rather than buyers.
However, a more comprehensive review of the tax is more likely to come from
the Conservatives. “There is one way in which a Cameron leadership could
really impact on the market,” says Max Ziff, chief executive officer of
Humberts Group estate agents. “He has mooted a potential change to the stamp
duty system from the current stepped levels to a tiered system, which would
be much fairer and would generate greater realism in the market.”
Hear Bricks and Mortar’s podcast on the London property market at: timesonline.co.uk/property
RIPE FOR REFORM
Brown is unlikely to reform this tax, but he may raise the lower threshold
from its level of £125,000. Some commentators suggest he should move to a
tiered system, avoiding the big jumps in the present banding system.
Buy-to-let: relief on mortgage interest payments for buy-to-let
investors, because they would probably then set up limited companies through
which to invest, thereby getting round the change.
Interest rates: “The best thing that Gordon Brown can do for homeowners
is to manage the economy correctly, because this will keep interest rates
low,” says Mike Warburton, of Grant Thornton.
A divisive article
Friend or foe of landlords? what a stupidity... he is the PM of everybody.
If there were no people renting how could the market be sustained?
Stop this nonsense of the tax break for BTL!!
Michele, Richmond, UK
Two factors facing homeowners:
- Inheritance tax. Either raise the threshold or better yet abolish it. Relatives might be more willing to shell out to keep granny in a home if they stood to cop the house tax-free.
- Real estate crash. What goes up has to come down and it won't be pretty. Especially for those left standing when the music stops.
Bottom line: Gordon won't let the market crash. He'll need to keeps his options open for a snap General Election. And trying to slow the market down is like reducing speed in a light aircraft. You risk a stall.
Which means first-time-buyers will be seeking their fortune in the colonies.
Andrew Milner, Yokohama, Kanagawa
I am 17 and I was born and live in Cornwall. Due to the sudden increase in house value I will be forced to move out of the county to live in an area where it is cheaper.
It is the younger generation who is impacted most by Labour and for this reason I will be voting Conservative in the next general election as I will be able to vote. I'm sure other young people agree with me and will be voting this way.
Adam Smith, Truro, Cornwall
The equity these middle classes have gained on Gordon's "healthy" housing market will only be realised through the immense debt facing their children. Are you really foolish enough not to realise how damaging this is? This isn't free money you know. Someone has to pay for it. I'm sure any middle class parent with an ounce of common sense will not be celebrating this housing scam.
Paul Turnbull, Tynemouth, UK