PropertyInvesting.net: Property Investment Special Reports

37: Effects of UK taxation - why prices have risen so strongly in the North and have been subdued in the South

PropertyInvesting.net

With average UK wage growth of 4.4% and record low unemployment throughout, one wanders why the northern property boom has been stronger in the last five years than that experienced in south.

Accountants Smith and Williamson Ltd have calculated that since Labour got to power in 1997, people earning £25,000 have seen there tax burden increase from 36% to 41%. However, those with £40,000 earnings have sent their tax burden increase from 36% to 50% - over double the increase in taxation. This has been felt more acutely in London and the SE where the cost of living and housing is and has always been higher – leading to higher average earnings (and hence higher levels of taxation and tax by stealth). Furthermore, the massive increase in stamp duty has also affected people living in the south of England far more than the north. For example. the average stamp duty for someone with a house in Surrey has risen from £1,261 in 1997 to £7,792 in 2005. Add to this higher council tax on more expensive property, and you can see penalty upon penalty for the relatively well off people living in expensive houses mostly in the south – the government have probably wanted a cut of the value made by these more wealthy home owners.

Now that the stamp duty threshold has risen from £60,000 to £120,000 – this will save many thousands for northerners. It not help people in London much because only 3% or properties are sold below £120,000 or are bought in deprived areas (where there is no stamp duty on properties below £150,000 value).

So what does this mean for the property investor? It depends who gets voted in next month – and the size of the majority. A hung parliament would likely lead to a coalition between Labour and the Liberal Democrats – something financial markets would not like due to the uncertainty of policy, pace of reform and lack of stability. Labour getting back in power would likely lead to higher national insurance and higher tax through stealth – particularly of the higher earners, to pay for public spending and fiscal deficits. A large house building programme in the south would likely start – which could subdue price increases in the lower end of the market (say £80,000 to £200,000 range). A Conservative government would likely reduce house building programmes, tighten spending, would probably be popular with financial markets and are unlikely to tax property to any higher levels than Labour have done in the last eight years. They would likely become more isolationist from the EU and our chances of joining the Euro would drop – leading to a higher pound and possibly slightly lower interest rates. There would be less public sector workers, a more subdued lower end rental sector and a strong service sector – with more even taxation of the working and middle classes (or even a flat income tax rate).

If Labour get in – expect continued strength in the northern housing markets, particularly in areas with strong service and public sector growth, in the price range £60,000 to £120,000 value (example - Bolton, Blackpool, Huddersfield, Marchester, central city Liverpool, Gateshead). In regenerating areas with large amounts of public funds being invested in the south – also expect prices to rise in the lower end of the market - £100,000-£120,000 – say, Northfleet, Gravesend, Stratford, Forest Gate, Woolwich.

If the Conservatives get in – it's likely the public sector would decline and private and services sector grow significantly – so middle class areas of West London-M4 corridor say in the range £150,000 to £400,000 would do well, along with Stratford, Docklands, City, West End and southern England in general. Areas with high exposure to manufacturing could suffer, like the West Midlands and the more industrial parts of the north. Holiday homes and second homes in southern England would also likely do well. In summary – the taxation of the middle and upper classes would not rise further and would probably fall slightly from current levels. The north would also do okay, but not as well as if Labour get back in.

In the longer term, because 900,000 people are due to need homes in the London/SE England area up until 2020, if John Prescott’s ambitious house building plans are not implemented, there will be a continued housing shortage in the south leading to still higher prices, particularly in the mid to lower end of the market. As elderly people retire with massive housing wealth, they are likely to either help guarantee their offspring’s mortgages or provide deposits for these first time buyers – Labour’s target of having 75% of the population as home owners (currently 71%) in the next years will underpin this if they get into power for a third term. The Conservatives would likely have a similar aspiration and encourage home ownership, but prevent significant building on Greenfield sites, which would support prices particularly in both rural, towns and cities, particularly in the south.

If the UK economy and customer confidence declines - in part due to this higher taxation, then interest rates are likely to drop to the 4.25 to 4.5% range in the next year or so, with CPI inflation around the 2% level. This based on pretext that oil prices stay below $60/barrel - though the treat of them rising to say $80 is increasing by the week. Anyone wishing to hedge against high oil prices should invest in Aberdeen, Scotland (or local areas around Theddlethorpe, St Fergus, Bacton, Fawley, Isle of Grain, Ellesmere Port!).

Good luck with chosing the right place to invest at the right time! And just to make you feel more positive, purchase of a private house well below the inheritance threshold of about £280,000 avoids all capital gains tax. Most tax efficient. Particularly being below £120,000 property, or properties in deprived areas below £150,000. Using "other peoples money" (OPM) to invest and leverage up must be about the fastest and lowest risk way of creating personal wealth - if you buy the right property in the right place at the right time!

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