Residential property prices are continuing to edge upward and are now less than 10% below their 2007 peak, according to the latest figures from the Nationwide.
Its May price index shows that values increased by 0.5% month on month, the annual rate of house price inflation has dropped from 10.5% to 9.8% and prices are up 12.2% since their February 2009 trough.
May’s increase is less than the 1.1% rise seen in April and the market is still experiencing thin transaction volumes and a relative scarcity of properties for sale despite a slow return of more sellers in recent months, according to Martin Gahbauer, the Nationwide’s chief economist.
He believes that the current supply demand balance on the market is still consistent with relatively stable to modestly upward trending prices but the impact of expected changes in Capital Gains Tax (CGT) depends on the timing of its implementation.
The coalition agreement between the Conservatives and Liberal Democrats contains plans to increase the rate of capital gains tax charged on the disposal of non-business assets, potentially including second homes and buy to let investment properties. It is currently 18% and some expect it to rise to 40%.
‘With regard to what the short term impact will be on the housing market and house prices, the key question is around the timing and implementation of any CGT increase. If there is a significant time lag between the announcement of the increase and its actual implementation, then some second home owners and buy to let landlords may decide to sell in advance of the higher rate being introduced. Such a development could lead the supply demand balance to shift more in favour of buyers and relieve the current upward pressure on house prices,’ said Gahbauer.
‘However, it is difficult to know with any precision how many people would bring forward a decision to sell. The incentive to try to beat the higher tax rate is most pressing for those who have owned their properties for a relatively long period of time and therefore have relatively large unrealised gains,’ he explained.
‘Conversely, those who bought their second homes or investment property within the last five years have little incentive to sell early in order to beat the tax change. House prices have only risen back to their mid-2006 level and the first £10,100 of capital gains is currently tax free. If the new rate comes into effect immediately on 22 June, then supply conditions are unlikely to be affected materially as any potential sellers would not have time to react,’ he added.
Gahbauer said there are some examples of where tax changes have had a significant short term impact on the housing market. Most prominent was the March 1988 announcement to end double Mortgage Interest Relief At Source (MIRAS) for cohabiting couples. The implementation of the tax change was postponed until August of that year, which prompted a rush of buyers to try to beat the deadline. The result was a temporary surge in property values, with house prices increasing by 18% between the first and third quarters of 1988.
‘However, the most recent change in CGT rates announced in the 2007 Pre-Budget Report did not have any discernable impact on the supply of property on the market. At the time, CGT rates of 24 to 40%, depending on taper relief and income status, were cut to a flat rate of 18%. New instructions to sell property remained very low even after the tax changes were introduced, although this may also have been due to the very weak market conditions prevailing at the time,’ said Gahbauer.