Thursday, May 13, 2010

ComDem CGT rise will precipitate a property crash

First some background on Capital Gains Tax (CGT).

CGT was 40% under John Major, with taper relief which took into account that part of capital gains was down purely to inflation, but distorted the market in that it forced entrepreneurs and shareholders to wait ten years or more before their CGT tax dwindled to anything bearable.

Gordon Brown as chancellor changed this to a flat 10%, so that start-ups could if they wanted float their companies within three years or less and not be penalised. This did encourage start-ups such as Phones4U and others. Of course his CGT cut also benefited the new Buy-to-Let entrepreneur.

Alistair Darling then raised the CGT rate to 18% in 2008 (though it remained 10% for business payouts under £1 million).

The new ConDem government aims to raise CGT to the marginal tax rate on "non-business assets" - so 20% for basic rate taxpayers, 40% on higher rate taxpayers and 50% of those whose income is over £150k. It's also clear that they don't regard property to be a business asset.

Unfortunately, they haven't said "this tax increase is effective at midnight tonight". They've given notice that it will come into effect at the emergency budget in June. Anyone around at the time of Nigel Lawson's idiotic "notice" that he was removing double tax relief on property will recognise the dangers. You'd think the Tories would learn from their mistakes, but no!

We are going to see a flood of properties listed on the market by entrepreneurs hoping to beat the tax deadline, and they are likely to slash prices just to get a sale (the CGT increase is so eye-watering, it's worth cutting prices).

The increase in supply will undoubtedly lead to a crash in prices. Especially when the sellers have a deadline. One of the successes of the Brown government was to ensure that property prices did NOT crash during the recession. The idiotic Con-Dem'd government appear to be undoing all the good work.

There are 14.5 million homeowners in England alone, who will all be affected by a property crash precipitated by the stupid Con-Dems.

Some on the extreme right and the extreme left like to rail at landlords, take pleasure in property prices falling and long for the disappearance of the private landlord. However, landlords service a need in our economy. People aged 18-30 need somewhere to live, this is the stage of their career where they move about the country and homeownership hampers them. Private landlords fill a need. The alternative is council housing, but most of it was sold by Thatcher and there wasn't any capital to rebuild the stock (and even less capital to do so now). It's either rent a flat or live in a cardboard box. There is no benefit to these entrepreneurs being forced to sell out, and no benefit in precipitating a property crash.

On a lot of the financial forums there are people ruefully wishing they had voted Labour. New Labour was a careful balance between helping the poor through a minimum wage increased faster than inflation plus tax credits, and supporting the middle class by underpinning the property market and encouraging entrepreneurship, with the governmemt always ready to support the economy in downturns through public spending.

The Con-Dems by contrast have an incoherant set of policies. The stability of the economy seems secondary to getting themselves into government with ministerial Jags. I understand that some LibDems are peeved that Ed Balls was scornful of their fiscal policies during the coalition talks. Apparently he hurt their feelings. Well, Good On Ed Balls, I say. If the Conservatives had any sense they too would have sent the LibDems away with a flea in their ear.

As the distress in Middle Britain sharpens, my sense is that Labour's best chance to win the next election is from the centre where we won in 1997. I was going to go for Ed Miliband for leader just because he's nice, but am now seriously considering Ed Balls. Telling the fruitcakes in the LibDems where to go shows great judgement. Among his achievements is the original idea to make the Bank of England independent, and he was key to persuading Gordon Brown that the euro was rubbish (and Brown, with his usual political skill used Blair's weakness over Iraq to permanently rule out the euro in summer 2003). He has the brains to make a great Prime Minister.


Neil Harding said...

Ed Balls would be a disaster, so would David Miliband. How do I know? Well I predicted Brown would lose us votes even before he became PM. Image matters whether we like it not. Balls is fat and comes across as pompous.

I would pick the best looking person with good communication skills - which, of the limited choices available, leaves Jon Cruddas and Ed Miliband. I am on the left, so Jon would be my choice.

Sadly Labour members are likely to choose neither because the party has become so hollowed out only neanderthal tribalists, charlatans and nerds are left in the party. And none of these have got a clue about public opinion.

Liked your analysis of CGT though. You could well be right about a property crash. That'll please middle England!

Andreas Paterson said...

I'm afraid I disagree with your analysis pretty seriously here. Before we even get into all the negative social consequences of it, the property bubble we currently have is storing up trouble for the future, something will need to be done about it eventually.

I'm also not entirely sure that the CGT rise will be as bad as you say. While some BTL investors may be looking at selling, I'm sure that a good proportion of them are value investors looking for a regular return who won't be all that bothered. Sure, some might be encouraged to sell by this announcement but I'm not sure it's going to trigger a mass sell off.

On your point about the value of landlords, I'm not sure that this really adds up either. Buy to Let is a relatively new phenomenon (I believe it began properly around 1995) and (to my knowledge at least) there was no great shortgage of rented property in the days before buy to let. As far as I can tell the main effect of it has been to force may potential buyers to stay either living with their parents or in rented accomodation.

As much as I dislike our new overlords, this is one policy I'm actually quite happy to see.

snowflake5 said...

Neil - I would quite like Yvette Cooper to stand, she would make a nice contrast to the posh boys from the Con-Dems. But I understand she's ruled herself out.

Andreas - if you want to raise CGT on property, you need to do it on budget day, where you announce it's effective from midnight.

Giving any kind of notice is suicide, as you will get a sharp increase in properties on the market as people try to beat the deadline. Sharp increase in supply without a sharp increase in demand leads to sharp price drops. And ordinary people in homes suffer. It ain't no fun being trapped in negative equity (did that in the early 90's, and it was hell).

The problem with the whole property thing is that you have some people trying to force a crash for ideological reasons, and some other people trying to stoke a boom for greedy reasons. The ideal is what Darling achieved since 2008, which was a steady flatish market. No boom, but no-one really losing money either. But I'm afraid that era is over now.

Anonymous said...

Ed Balls!!!???!!!???

Have you finally gone MAD??????

The fact that he very nearly lost his formerly very safe seat last week should tell you all you need to know - or so I thought :-)

If you don't believe me, snowflake, look at what the Tory blogosphere have to say about our next leader - almost without exception, they are PRAYING for a Balls victory......

Nuff said :-)

Oh and Neil, your comments about LP members are neither accurate or needed. You may (or may not) be interested to know that THOUSANDS of people have applied to join (or in many cases, re-join) the party in the last few days since the Great Clegg Betrayal. Maybe that should give you food for thought!

DevonChap said...

I see that with the change of government you have resumed frequent blogging as opposed to the fortnightly(ish) missives of late. Is it that you couldn't defend the government very well (we all remember your claims that the recession wouldn't happen/would be mild/would end asap etc) and now you don't have to?

Opposition provides a freedom, but it is principally the freedom to complain.

snowflake5 said...

DevonChap - I hadn't been posting before the election because I was way too busy doing on the ground campaigning, and to good effect - we held both our seats in Southampton and overall we denied the Tories a majority. If Tories wasted less time online, and actually campaigned on the ground, who knows they might have even won!

how do you feel about the fact that we have a new unelected PM, who appears to be burning all his manifesto promises (he wasn't going to cut NHS spending, now he is; he wasn't going to raise VAT, now he is; he wasn't going to raise CGT, now he is etc). He was lying through his teeth in the debates when Gordon Brown challenged him on VAT, wasn't he?

Jonathan Bean said...

The 50 day delay is cleverly designed to allow BTL investors to release property back to hard working FTB's. It's a win-win, the BTLers get a low tax rate on their gains, the FTB's at long last get a decent supply of property at a slightly less inflated price. I'm not sure it will create the 50% fall that the market needs to bring it back to affordable levels, but a 20% price fall would still help FTB's a bit.