Other Villains - Market Comment Autumn 2017

It is now three years since the then Chancellor, George Osborne, took an axe to the top end of the property market with his Stamp Duty changes. Since then turnover has fallen by between 40% and 50%, depending on who you talk to. Foxtons’ share price is a quarter of what it was in 2014. The link is obvious and well flagged, but while Stamp Duty is the Capo di Capo of villains, there are others that are quieter but perhaps even more invidious. They are also now becoming more apparent and the list is a long one. The UK, for most of the boom (and bust) of the last thirty years, has been something of a tax haven. If that is a little strong, then certainly a place where you could get things done, make money - and keep it. That is changing, partly in an attempt to gain a bigger slice of the wealth pie for the Treasury, and partly as a political reaction to perceived inequality and the financial crisis. The climate for wealth has become more chilly; not yet arctic but definitely autumnal.

Take the tightening up of the treatment of Non-Doms. Whatever the rights and wrongs of their tax status (the UK is unique in the concept of domicility) they are big contributors to the Treasury to the tune of £10 billion a year - the equivalent of 2p on the basic rate of income tax. Accountants’ surveys show that many - a majority - of the 121,000 Non-Dom’s are thinking of removing themselves from the clutches of HMRC and we know plenty who are in the process of doing so. The nature of these people is that they are wealthy and are owners, and potential buyers, of property. They will now be sellers. Corporate as well as personal taxation has come under the spotlight as well. You may recall a doyen of the Private Equity market who (unwisely) remarked a couple of years ago that his cleaner paid more tax than he did. He certainly is now: the rules have changed so that he is now paying income tax rather than capital gains tax on most of his income. There are a number of Private Equity clients of ours who are now planning an extended sojourn in Monaco. The point is that this wealth can move - and does - and is a classic example of the Laffer Curve in action: taxes go up and a point is reached when tax receipts go down.

This is happening against the backdrop of Brexit which has, so far, had a neutral effect on the property market. Uncertainty has been balanced by a currency devaluation that has made a sterling purchase around 20% cheaper for those that think in dollars or euros. The last year has been something of a ‘Phoney War’, where the shape and form of the exit is gradually becoming apparent but where the eventual outcome is still opaque, though it is hard to see it being positive in the short to medium term - unless you are a head-banging Brexiteer that is. One rather disturbing thing on which we can report is that two long-resident European clients both said recently that they no longer felt welcome here; and they weren’t referring to HMRC. This is not only unpleasant, but concerning for a city that prides itself on being tolerant and cosmopolitan and has claimed, not unreasonably, to be the world’s capital city. It doesn’t add positivity to the mood-music when the likes of Boris Johnson start calling for restrictions on foreign ownership in London. This is the same Boris Johnson who, as mayor, boasted of the number of billionaires in London and allowed developers carte blanche to put up whatever tower they liked in the heart of the capital to be sold to exactly this cohort.

The lending market has also tightened so that, while we have the lowest interest rates ever, getting your hands on the money has never been more difficult since the bad old days of queuing for the building society. The Mortgage Market Review was a good idea in principle - but has turned out, too often, to be a box-ticking exercise where wealthy sixty-five year olds, for instance, with no other debts are turned down because they are no longer employed. If they try to finance a buy-to-let, it won’t get any easier and, by 2020, they won’t be able to set their interest against rental income for tax purposes. This is what we mean by autumnal.

All this is, of course, not just an issue for London and the UK but also for the rest of the world. Hong Kong, that bastion of laissez faire capitalism, shares the problem of footloose capital winding up in its property market and having to discriminate against it with penal rates of Stamp Duty. Governments across the developed world are over-borrowed and looking in every corner for revenue.

Despite all this, there is still an active and ultimately healthy market ticking over, more so at the lower end of the price range than the top - but then that’s what you would expect. It is also much better for wide, modern flats than tall, tired houses. What it isn’t, is big and active enough to feed the ecosystem of sale, purchase and renovation that has grown up over the last twenty years. Foxtons’ shares are still, consequently, for the brave. It is a market that is functioning fine as long as everyone understands that quality is everything and when there is an appreciation amongst sellers that, ultimately, Stamp Duty is their problem.

We were contacted recently by one of our very first clients in London who is an active citizen of the world. His view was that one of the essential pillars of London and the UK’s prosperity was a liquid and active property market. It allowed people like him to come to Britain and be a temporary citizen with a stake and an interest in more than just the lobby of an hotel. The picture he painted is getting harder to recognise. This is illustrated by the rise of the ‘super-rent’ - rents of £20,000 per week or more. The reason that these get paid is that the costs of buying, unless you have a time horizon of more than five years, makes the rental option cheaper - not to mention less hassle.

The property market is always a tempting target. It is rooted to the ground and can’t move. But owners and buyers can, and they take with them not only their potential property taxes but also their businesses, income tax and VAT. Politically, it may be an easy target - but it may not be a wise one.