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Pre-Budget Report Reaction

Property and the PBR

Last week’s Pre-Budget Report (PBR) from Chancellor Alistair Darling on how he intends to get the UK economy back on the road to recovery and growth was anticipated with equal measures of anxiety and expectation by the public and professions alike. Not only would it be the final budgetary planning from the government until the announcement of the General Election, but it came in the wake of revelations about this year’s banking bonuses growing in size, despite the fact that the taxpayer now owns large proportions of many High Street banks, having saved them from oblivion with huge cash bailouts barely 12 months ago.

Given the flood of commentary from experts which emerged in the hours following the PBR, we thought it might help to consider the implications of the measures set out in the report, and collate the opinions of those experts in their fields on specific elements of the Chancellor’s speech.

The decision not to extend the Stamp Duty holiday beyond 31st December 2010 has attracted the most attention among commentators, with Royal Institution of Chartered Surveyors (RICS) chief analyst Simon Rubinsohn saying:

“It is very disappointing that the Chancellor has not taken this opportunity to extend the stamp duty holiday for purchases of residential property. Although activity in the housing market has begun to pick up this year, transactions still remain well down on historical norms. Land Registry data shows sales of just over 53,000 properties for the latest month available compared with a long run average of close to 90,000.

”Moreover rather than simply reverting back to the previous structure for SDLT, RICS believes the time is ripe for a more fundamental overhaul of the tax. An extension to the holiday should be followed by a move to a marginal system where higher rates are only paid on the value of a property over the tax threshold. This would help remove the distortions caused by the current slab system and enable the property market to operate more effectively in the long term.”

'Disappointed - not surprised'

The Council of Mortgage Lenders declared themselves ‘disappointed - though not surprised’ that the Stamp Duty holiday was coming to an end. They said that the announcement represented another missed opportunity to fundamentally reform the tax and its ‘distorting’ effect on the housing market.

Other commentators were equally disheartened by the move. Kevin Wilkes, Managing Director of the Worldwide Property Group said, “Given the fragility of the UK housing market and economic recovery, it is disappointing that the chancellor did not take this opportunity to extend the stamp duty holiday. The holiday has been an influencing factor in the recent tide of positive news in the housing market and a further sustained holiday period would undoubtedly continue to support the housing market’s recovery and subsequently the economy itself.”

Others in the property industry looked to the effects that the return of VAT to 17.5 per cent will have no house building and renovation. Brian Berry, Director of External Affairs at the Federation of Master Builders said, “The Chancellor’s decision to increase VAT to 17.5 per cent is a serious blow for both householders and builders wanting to refurbish properties to make them greener and more energy efficient. Given the Government’s stated commitment to refurbish every single home by 2030 it is very disappointing that the Chancellor has decided to increase the VAT rate.”

RICS also thought the government had missed a trick, saying the Chancellor had “missed an opportunity to help stimulate activity in the construction sector by reducing VAT on the repair and maintenance of buildings down to 5%. This reduction would have helped to bolster activity in the construction sector, which has been particularly hard hit during the recession, as well as retaining skilled workers in the industry. A similar scheme in France actually led to an increase in government revenue as more work was carried out and there was a reduced incentive to operate outside the tax system.”

A recent survey of RICS members suggests that the ending of the stamp duty holiday could have a detrimental effect on the recovery of the housing market in regions that are already lagging behind. Surveyors in the West and East Midlands, Wales and Scotland believe that they will see a drop in activity in 2010 following the end of the stamp duty holiday. The end of the stamp duty holiday is unlikely to have a significant impact in London and the South East, where average prices are above the holiday’s £175,000 threshold or the north where the average price is below the lower £125,000 threshold.

Bonus tax

Other parts of the PBR will have an influence on the housing market in the UK, especially the chancellor’s much-vaunted one-off bonus tax on City bankers. James Moran, Franchisee of Winkworth South Kensington says, “The financial sector now represents 15-20 per cent of general sales enquiries in our office, compared to 5-10 per cent in August this year. The anticipated return of bonus buyers next year will help spur an already buoyant market and will install confidence in prospective vendors. This will, in turn, encourage vendors to come to the market and will hopefully help to alleviate the current shortage of available property. The levy of 50 per cent on bonuses could have an affect on demand from City buyers, although we do not anticipate it to make a significant change.”

Liam Bailey of Knight Frank added: “The impact of the new one-off Bonus Tax will be negligible in terms of the wider housing market. Prices are unlikely to fall - even in London - as current price levels have not been bid higher in recent months in anticipation of bonus money which is now not going to be paid out.
There will be an impact on housing transactions, which are likely to drop slightly, as some purchases in 2010 would have followed the receipt of a hefty bonus.

The real impact will be felt in the longer term. There is a risk in terms of the impact on the economy and the housing market of another seemingly ad hoc, politically driven tax change. We have seen several in the past few years and cumulatively they risk weakening the attractiveness of the UK and London as places to do business.”

On the positive side, another initiative is to implement the American tax increment financing (TIF) initiative that would allow councils to raise funding for infrastructure by borrowing against future business rates.

Liz Peace, chief executive of the British Property Federation, said: “This is a good move for the industry as we all know that new funding will be extremely limited. Councils must be given the powers they need to raise funding and if we are serious about kickstarting construction then action will be needed to support TIFs and ensure that we do not stifle great opportunities to rebuild our towns.”

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