Since the 2008 worldwide economic downturn there is no doubt that demand for property has increased dramatically. For many this is as much a consequence of a lack of confidence in the stock market, low savings rates and a desire to find the next “safe haven” as it is a genuine interest in property. This has led to some property markets becoming disconnected from underlying economic trends prompting governments around the world to react in very different ways.
So, is taxation really the bluntest instrument that the authorities have at their disposal when trying to control worldwide property markets?
Supply and demand
Whichever way you look at it, supply and demand is the underlying factor dictating the trends of any property market around the world. If there is excessive supply but limited demand prices will fall, if there is excessive demand but limited supply prices will rise, simple?
This has prompted many investors around the world to question why governments across the globe do not simply address the supply/demand issue rather than introducing an array of taxes. The benefits of increasing supply can spread right across the global economy bringing new businesses into play, creating new jobs which feed back into the economy via consumer spending. While this is obviously a simplified version of the real world is it really that far from reality?
Help to buy schemes
The UK government has been at the forefront of an array of help to buy schemes with many first-time buyers struggling to climb onto the first rung of the property ladder. This may curry favour with voters but at the end of the day does this artificial assistance not simply feed the growing rise in property prices. The authorities may be keen to publish reports highlighting how many people have been helped onto the property ladder but what about those in the future chasing property prices which are being squeezed higher and higher.
Surely this type of funding would be better spent at grassroots level? Why not increase the number of properties available thereby reducing the “squeeze effect” and hopefully giving future first-time buyers an opportunity to buy without artificial assistance from the state. Financial assistance in the short term certainly grabs headlines but does it do more damage than good in the longer term?
At the heart of each and every government policy around the world is the obsession to increase the tax income for the state. We have seen this many times before in an array of investment markets which had been performing well. If somebody else is making money then the authorities seem to think they should have a larger slice of the action. This has led to an array of specific property taxes in the UK with the buy to let market coming under particular focus.
Using additional taxes as a means to squeeze profit margins will eventually see investors looking elsewhere for their future returns. The property market is seen as a cash cow by many politicians but over milking of this situation will significantly reduce future income.