Wednesday, 17 December 2014

More Mansion Tax Double Think

As reported in The Times this week by economics and property correspondent Kathryn Hopkins,

"Young professionals in London could experience large rises in their rent if a mansion tax is introduced next year, an estate agent has warned.

Knight Frank said that if landlords had to pay Labour’s proposed tax on properties worth more than £2 million, they would be highly likely to pass the extra cost on to tenants.

Any additional costs would make landlords’ investments less viable, Knight Frank said. The impact would be particularly marked when landlords were paying a mortgage on the property.

“There has not been any clarification as to whether the proposed mansion tax would be the responsibility of the landlord or the tenant, but our assumption is that it will be the landlord,” Tim Hyatt, from Knight Frank, said.

Hopkins faithfully regurgitated the above. But in the very next paragraph...

Meanwhile, Hamptons International has said that George Osborne’s changes to the stamp duty system will boost prices and transactions in the first half of next year in all but the most expensive areas of England and Wales.

Its analysis of home sales this year suggests that 72 per cent of buyers would have been better off under the new regime, it would have made no difference to 27 per cent and only 2 per cent would have been worse off.

The typical gain is equivalent to 1 per cent of the purchase price."

So, increases in property taxes (Mansion Tax) raise prices (rents)... but decreases in property taxes(SDLT) also raise prices (capitalised rent/selling prices).

Granted, economics isn't Kathryn's main subject, but surely she should at least try to highlight this obvious contradiction.

Rents are set at the upper limit of affordability (inelastic supply) not cash costs. Landlords are not a charity, they are already charging the highest amount their tenants can afford. The incidence of taxation on immovable property always therefore falls on the landowner.

So, it doesn't matter who is legally liable to pay property taxes. The landlord or tenant, the buyer or seller. The effect is always the same: the tax reduces the landowner's rental income or selling price. Her analysis of the effect of SDLT changes on selling prices is correct; the assumptions about the Mansion tax are 100% incorrect.


mombers said...

Going to try get hold of Tim Hyatt if I'm bored :-)

Bayard said...

BJ, it's amazing how many people think the world operates on "cost plus".

Mark Wadsworth said...

M, who he?

B, a subtle point which you have made before. But that it's bollocks is most easily illustrated with monopolies like landownership.

Dinero said...

its conceivable that in the short term London landlords would try and pass on such a tax to tenants, and if every penny of the rent is being paid in mortgage interest then the landlord would be compelled to do that by their relationship with the bank.

mombers said...

Dinero, in all my years renting, I was never asked to pay more rent because interest rates had gone up. Or been given a rent cut when they plummeted of course! As a former landlord in Cape Town, I could never pass on the much more volatile interest rates in South Africa to my tenants. I'm sure some will try to pass on the MT but there's no chance they'll succeed.

mombers said...

MW, Tim Hyatt is the head of lettings at Knight Frank - he's the one the journo interviewed.

mombers said...

I tweeted him BTW - @lettings_london

benj said...

@ Din

I'm sure they'll try, and in the very short term (if the rents are on an upward trajectory anyway) they might succeed. After all the threat of eviction is where the landlord can get a short term advantage.

But, in the medium to long term, the market equalises and tenants will be paying exactly the same, Mansion Tax or no Mansion Tax.

As Mombers pointed out, rises in interest rates will make the MT look like very small beer. And if rents do track interest rates, it must be very small, as I haven't ever noticed it.