With the current boom in London house prices and shortage of supply, how much should we fear the influx of foreign property investors? The UK economy seems to be on the road to recovery but the Help to Buy scheme and foreign property investors has revived the debate about a new property bubble.
Earlier this month, the UK Parliament published its Economic Indicators Housing Market Report, revealing that there were 29,510 house building starts in England in Q2 2013 which was 33% more than in Q2 2012 while mortgage approvals in September 2013 were 34% higher than the same period in 2012 and house price growth has now reached its highest annual rate since 2010, with a 6.9% increase in October.
However, fears persist of a repeat of an overinflated property market. In addition to concerns that house price growth seems to be primarily located around London and its commuting districts there are also fears that Londoners are being forced out of the property market.
The current tendency is to blame foreign investors for pushing up prices in London and pricing out average Londoners. This fuelled the political debate about the possibility of introducing Capital Gains Tax on foreign property investors and the implementation of it in an effort to tackle what many see as an emerging housing price bubble in London.
At first glance, it seems logical to impose a tax that UK buyers are already subject to, as it is worrying that UK-based buyers are not getting first refusal on a lot of new developments, as they are packaged up and sold off overseas first. Both Vince Cable and Ed Balls both came out in favour before the announcement of closing the loophole that ostensibly favours foreign investors over British ones, particularly since a highest band of capital gains tax was introduced at 28% in 2010.
Now that this tax has been implemented it may at least swing the pendulum back in favour of UK buyers, although these are often mortgage-based purchases compared to the large majority of pure cash transactions from overseas purchases. This introduces a separate set of issues, for instance will there be enough bank lending for UK buyers if overseas buyers hold back, and if not, could this have a negative impact on the London property market?
However, foreign investors have also been a big source of stability in the UK property market. Due to their high levels of liquidity, on most occasions, they do not require credit to fund their purchases. As a consequence, whilst the property market in the rest of the UK was buffeted by recession pressures and a credit squeeze, Central London was by and large stable. With interest rates at an all-time low the likelihood if not certainty is for borrowing to get more expensive in the future. Hence the fears of another housing market implosion.
Whilst the capital gains tax implementation could deter some international investors, the Chinese, for instance, have such high taxes in their own country that UK property would likely still remain very attractive.
Jonathan Hudson, founder, Hudsons Property W1