Taxes are part of life, no matter where and no matter when, but there is a smaller or a bigger pill to swallow depending on where you are on the world map. If you reside in Europe for example, chances are the government will be more demanding of your contribution than here in the US, particularly these days when most countries in the E.U. are looking for money to offset growing deficits. It is indeed the picture today in London.
The U.K. government just recently kicked up the sales tax on residential properties in excess of $3.3M (roughly 2 million pounds) from 5% to 7%. Ouch! For us, Americans, it would be painful enough to pay sales tax on the sale of a house but, on top of that, having to deal with a steep 40% tax increase might be a deal killer or at least a serious deterrent. Not so much in London, yet.
So far so good, buyers are still buying upscale properties and sellers are still selling them. As a matter of fact, the number of sales for homes impacted by the UK stamp-duty increase has actually doubled in May, the month after the axe fell, compared to the same month of 2011, according to the Land Registry. But how long will the momentum keep going?
A new study from real estate firm Knight Frank LLP, reported by Bloomberg News, shows that prices for luxury homes in central London rose at their fastest rate in September, propelled by the demand for properties which escape the new higher sales tax. The number of luxury homes sold, that were not subject to the higher levy, rose 23% y/y in the 3rd quarter, according to the report. Knight Frank further explains that more than 50% of the buyers in the 2M pounds+ price range are overseas buyers. No surprise here. Russians & Indians, but also American, Italian & French nationals are leading the pack. Since March 2009, when values bottomed in the best of London as a result of the financial crisis, values have jumped 51%.
Higher taxes are a sign of the times. The Deputy Prime Minister, Nick Clegg, tried to rationalize the trend by using words which we also hear often on this side of the Atlantic these days. Listen: “Most people in this country don’t understand why people who have very high-value property don’t pay their fair share…It’s easier to stop tax avoidance on brick and mortar than on money you can move around the world.” Gee, I hope none of our politicians are going to make this pledge their next war horse…
The U.K. tax hike, as you can imagine, is not terribly popular with developers. Writer Chris Spillane explains in Bloomberg News that one of them is now in the hunt for New York prime real estate as an alternative. His name is Nick Candy. He helped conceive “One Hyde Park”, the most expensive apartment complex in Europe. He claims that London may lose its appeal for luxury developers with the tax hikes and the prospect of more coming.
All leading world cities are now competing for buyers, sellers and investment money at the top end. We have been writing about this phenomenon for some time. It does not take much for the demand and the money to change zip code, state or country.
Candy finds great price similarities between London & New York, so a tax hike in one could very well be the reason to look at the other to create new developments. Case in point, Chris Spillane notes that a furnished home in One Hyde Park sold for 7,500 pounds a square foot last year, roughly the same as a penthouse across the street in the Bulgari Hotel.
The competition is heating up; A lesson for all large cities and governments to think about and learn from, here, there, and everywhere.