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This summer has seen a marked change in the mood of the market, particularly for more expensive homes in the capital. Last year house prices were resilient, rising by around 4 per cent, according to the Nationwide Building Society.
Things have now changed. Prices fell by 0.1 per cent in August, and are down 0.4 per cent over the past three months. Estate agents Savills now thinks there will be just 1 per cent overall growth this year. Central London has been particularly badly hit, with recent declines coming on top of a gradual downward slither of prices. Savills also notes that prices in prime central districts are now down 22 per cent from their peak in 2014.
Allow for inflation running at around 4 per cent, and with earnings climbing at nearly 5 per cent, that means that in the space of a year London family homes could be substantially more affordable than they are now.
The answer to the first is partly that if you think something will become cheaper you are in less of a hurry to buy. Everyone understands that the house prices move in cycles and at the moment it is a buyer’s market. But behind that issue are fears about the forthcoming Budget.
If it were a capital gains tax it would only be paid when a home was sold; if a wealth tax it would be an annual levy. One form of the wealth tax would be new higher council tax bands for more highly valued homes. The advantage of that, from the government’s point of view, is that it would simply be an increase of a tax already in place, rather in the way in which second homes in many places are currently charged a higher rate than primary residences.
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And so, does this matter? The further you move away from London, the stronger the market is right now. According to Zoopla, the online estate agency, homes in the North of England get an offer in 26 days on average, whereas in the South it is 39 days. Earlier this year the agency thought that the greatest gains in prices would be in Scotland and the North of England, with Glasgow, Edinburgh and Newcastle high up the league.
The trouble is that if the market for more expensive homes becomes depressed that can lead to a knock-on effect further down the market. People who can hold off selling do so, while those forced to get rid of their property have to take a large loss. That nasty beast “negative equity”, when a home is worth less than the mortgage on it, would again stalk the land.
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House prices are an endlessly fascinating topic, and for obvious reasons. Some 64 per cent homes in the UK are owner-occupied, so the proportion of the population living in such a property must be something close to that.
But there is a fragility here too, as anyone who remembers the 2008 financial crisis will recall. From a macro-economic perspective that was all about banks becoming over-leveraged, buying bundled sub-prime mortgages and so on. From a personal point of view it was about people going into negative equity and in some cases losing their homes.
So you can see the point. If the Chancellor clobbers the housing market, as she may, she will clobber the economy as a whole. It’s difficult to model this. You can feed in shifts in interest rates and changes in real incomes to see what, other things being equal, might happen to house prices.
And I suppose we are getting some feeling for the impact of higher council taxation on second homes on those markets too. But we really have no idea whether the sort of ideas being kicked around ahead of the Budget could trigger a housing market crash, and what the knock-on impact of that would be. The Treasury is flying blind.
It’s uncomfortable. To make a point made in these columns earlier, there’s a lack of experience in the Treasury of the world of business and the influence of markets. There’s an intellectual case for trying to increase property taxation, but my word, if Rachel Reeves gets this one wrong she will be in Liz Truss territory.
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