News today that house prices were up 0.5% in May goes down well of course with Estate Agents, owners in negative equity and speculative buy-to-let landlords. It is bizarre how the UK has gone so overweight real estate – once tellingly decribed by Prof. Niall Ferguson as a “one-way, highly-leveraged bet on a highly illiquid asset“.
These figures though are a somewhat meaningless national average which actually contains extremely diverse regional bursts. Just look at the breakdown of those figures on Nationwide’s website here. So here are just two reasons for pessimism.
The ascendance of Sterling – you may recall that foreign buyers and foreign direct investment in general is at its strongest when the pound is at its weakest. Last year, there was actually quite a lot of buying at the premium end in upmarket areas by wealthy foreign investors. Since the beginning of the year, the nascent implosion of Euroland has led to a flight to relative quality – UK Gilts, driving up the value of the pound, but not to UK housing which is typically purchased through debt rather than cash in hand which you can’t get out of easily either.
A Capital Gains Tax rise – if you can’t risk a lot of your capital to make a substantial gain from buying property would you do it?
Probably not and the government should take note. Personally I’m all in favour of people making Capital Gains and big ones, especially if Banks are still not lending, consumers aren’t spending and the scope for government to increase aggregate demand through Keynesian pump-priming is limited by the size of the budget deficit. So it seems to me reasonable to aim long-term to reduce and eliminate all taxes on capital like CGT. Unfortunately Britain’s LibCon coalition does not see it that way and there are plans afoot to raise it considerably.
I hope very much that they will agree to something like John Redwood MP’s excellent compromise involving tapering relief. Mr Redwood gave a superb and ever thoughtful speech to the EPC the other night some of which he flagged up on his blog here. And because bank lending is still so meagre, the government could also endeavour to make tax-free gains made by retail investors who risk their capital on the purchase loan market organised by Zopa.