International think tank calls for property tax to prevent real estate bubbles

Property bubble burst warned by think tank

Pressure could increase in 2011 for a new property tax in the UK as a means of avoiding the real estate bubbles that the country is famed for.

Property taxes could limit future real estate market bubbles, according to research by the Organisation for Economic Co-operation and Development. It believes that taxes on property are the least harmful to economic growth, while corporation taxes rank as the most growth-unfriendly.

In a new report it says that preferential treatment had caused market distortion leading to capital flowing out of other sectors and into property and that many countries use outdated valuation methods.

The Paris based OECD says that the huge property bubbles that occurred in countries including the US, Britain, Ireland and Spain can be solved with real estate taxes. ‘Owner occupied housing has a favourable tax treatment relative to other forms of investment in many OECD countries through reduced tax rates or exemption for imputed rental income, mortgage interest payment deductibility and exemptions from Capital Gains Tax,’ it says.

‘The market value of property is not following a stable trend over time as the recent housing bubble and corresponding collapse in prices have demonstrated in many countries. This creates an additional difficulty in using the market value of property as a taxable base.”

It recommends that countries consider raising extra revenues through broad based taxes on consumption and recurrent taxes on residential property.

The UK though has been resisting such ideas. The British Government backtracked this year on a move to align capital gains and income taxes because of a revolt by owners of multiple properties, as well as entrepreneurs.

The National Institute for Economic and Social Research has argued that homeowners currently enjoy tax privileges compared with other asset classes and that these should be ended. In a 2006 paper, the institute said that a 1% property tax collected from owners of residential property would have yielded £30.5billion, based on property values at the end of 2003.

Separately, Adam Posen, a member of the Bank of England’s Monetary Policy Committee, argued last year that the authorities could seek to limit future house price bubbles with taxes.

Others though see it has a bad idea. Paul Hunt, managing director of mortgage software provider Phoebus, said he accepted that government needed to increase revenue, but that taxation was the wrong way to do so.

‘A recurrent tax on property sounds dangerously like a council tax, which is already at punishing levels. We already have a massive housing deficit so dealing with the supply should be the priority. I think the Coalition Government would be daft to pursue this idea further,’ he said.

According to Nicholas Leeming, commercial director of more property taxes in Britain would be enormously damaging, wildly unpopular and politically suicidal. ‘The huge ramp-up in stamp duty under Gordon Brown made moving home massively more expensive, but it did nothing to slow the boom in property prices. It merely made it financially punishing for people to move,’ he said.

‘An annual tax on home values would be even more iniquitous. If you want to limit boom and bust in Britain’s property market, planning law should be relaxed to allow the construction of more decent sized family homes. Squeezing hard working families for even more tax is not the solution,’ he added.

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